Correlation Between Microsoft and Royal Caribbean

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

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

Diversification Opportunities for Microsoft and Royal Caribbean

0.53

Correlation Coefficient

Microsoft  Royal Caribbean

Very weak diversification

The 3 months correlation between Microsoft and Royal is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Royal Caribbean Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Royal Caribbean Group 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 Royal Caribbean. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Royal Caribbean Group has no effect on the direction of Microsoft i.e., Microsoft and Royal Caribbean go up and down completely randomly.

Pair Corralation between Microsoft and Royal Caribbean

Given the investment horizon of 90 days Microsoft is expected to under-perform the Royal Caribbean. But the stock apears to be less risky and, when comparing its historical volatility, Microsoft is 2.34 times less risky than Royal Caribbean. The stock trades about -0.11 of its potential returns per unit of risk. The Royal Caribbean Group is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  22,079  in Royal Caribbean Group on December 29, 2024 and sell it today you would lose (1,789) from holding Royal Caribbean Group or give up 8.1% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	95.31%
Values	Daily Returns

Microsoft  vs.  Royal Caribbean Group

Microsoft

Risk-Adjusted Performance

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 latest abnormal performance, the Stock's technical and fundamental indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Royal Caribbean Group

Risk-Adjusted Performance

Very Weak

Over the last 90 days Royal Caribbean Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Royal Caribbean is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Microsoft and Royal Caribbean

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

The idea behind Microsoft and Royal Caribbean Group 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.

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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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.