Correlation Between Microsoft and State Farm

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

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

Diversification Opportunities for Microsoft and State Farm

0.34

Correlation Coefficient

Microsoft  State Farm

Weak diversification

The 3 months correlation between Microsoft and State is 0.34. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and State Farm Municipal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on State Farm Municipal 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 State Farm. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of State Farm Municipal has no effect on the direction of Microsoft i.e., Microsoft and State Farm go up and down completely randomly.

Pair Corralation between Microsoft and State Farm

Given the investment horizon of 90 days Microsoft is expected to generate 7.44 times more return on investment than State Farm. However, Microsoft is 7.44 times more volatile than State Farm Municipal. It trades about 0.1 of its potential returns per unit of risk. State Farm Municipal is currently generating about 0.06 per unit of risk. If you would invest  23,313  in Microsoft on September 17, 2024 and sell it today you would earn a total of  21,414  from holding Microsoft or generate 91.85% return on investment over 90 days.

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

Microsoft  vs.  State Farm Municipal

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 current stock price uproar, may contribute to short-horizon losses for the private investors.

State Farm Municipal

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days State Farm Municipal has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental indicators, State Farm is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Microsoft and State Farm

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

The idea behind Microsoft and State Farm Municipal 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.