Correlation Between Microsoft and Prime Meridian

Can any of the company-specific risk be diversified away by investing in both Microsoft and Prime Meridian 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 Prime Meridian into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Microsoft and Prime Meridian Resources, you can compare the effects of market volatilities on Microsoft and Prime Meridian 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 Prime Meridian. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and Prime Meridian.

Diversification Opportunities for Microsoft and Prime Meridian

0.09

Correlation Coefficient

Microsoft  Prime Meridian

Significant diversification

The 3 months correlation between Microsoft and Prime is 0.09. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Prime Meridian Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prime Meridian Resources 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 Prime Meridian. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prime Meridian Resources has no effect on the direction of Microsoft i.e., Microsoft and Prime Meridian go up and down completely randomly.

Pair Corralation between Microsoft and Prime Meridian

Given the investment horizon of 90 days Microsoft is expected to generate 4.61 times less return on investment than Prime Meridian. But when comparing it to its historical volatility, Microsoft is 10.28 times less risky than Prime Meridian. It trades about 0.08 of its potential returns per unit of risk. Prime Meridian Resources is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  8.69  in Prime Meridian Resources on September 2, 2024 and sell it today you would earn a total of  2.31  from holding Prime Meridian Resources or generate 26.58% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Microsoft  vs.  Prime Meridian Resources

Microsoft

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable technical and fundamental indicators, Microsoft is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Prime Meridian Resources

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Prime Meridian Resources has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Microsoft and Prime Meridian

The main advantage of trading using opposite Microsoft and Prime Meridian positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, Prime Meridian 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 Prime Meridian will offset losses from the drop in Prime Meridian's long position.

The idea behind Microsoft and Prime Meridian Resources 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.