Correlation Between Microsoft and PLAIDInc

Can any of the company-specific risk be diversified away by investing in both Microsoft and PLAIDInc at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Microsoft and PLAIDInc into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Microsoft and PLAIDInc, you can compare the effects of market volatilities on Microsoft and PLAIDInc and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Microsoft with a short position of PLAIDInc. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and PLAIDInc.

Diversification Opportunities for Microsoft and PLAIDInc

0.13

Correlation Coefficient

Microsoft  PLAIDInc

Average diversification

The 3 months correlation between Microsoft and PLAIDInc is 0.13. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and PLAIDInc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PLAIDInc and Microsoft is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Microsoft are associated (or correlated) with PLAIDInc. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PLAIDInc has no effect on the direction of Microsoft i.e., Microsoft and PLAIDInc go up and down completely randomly.

Pair Corralation between Microsoft and PLAIDInc

Given the investment horizon of 90 days Microsoft is expected to under-perform the PLAIDInc. But the stock apears to be less risky and, when comparing its historical volatility, Microsoft is 1.48 times less risky than PLAIDInc. The stock trades about -0.03 of its potential returns per unit of risk. The PLAIDInc is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  514.00  in PLAIDInc on September 30, 2024 and sell it today you would earn a total of  111.00  from holding PLAIDInc or generate 21.6% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	99.21%
Values	Daily Returns

Microsoft  vs.  PLAIDInc

Microsoft

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Microsoft has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable technical and fundamental indicators, Microsoft is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

PLAIDInc

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in PLAIDInc are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly abnormal forward indicators, PLAIDInc reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Microsoft and PLAIDInc

The main advantage of trading using opposite Microsoft and PLAIDInc positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, PLAIDInc can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in PLAIDInc will offset losses from the drop in PLAIDInc's long position.

The idea behind Microsoft and PLAIDInc pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

Check out your portfolio center.

Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.