Correlation Between Microsoft and Small Cap

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

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

Diversification Opportunities for Microsoft and Small Cap

0.3

Correlation Coefficient

Microsoft  Small Cap

Weak diversification

The 3 months correlation between Microsoft and Small is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Small Cap Profund Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Profund 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 Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Profund has no effect on the direction of Microsoft i.e., Microsoft and Small Cap go up and down completely randomly.

Pair Corralation between Microsoft and Small Cap

Given the investment horizon of 90 days Microsoft is expected to generate 1.6 times less return on investment than Small Cap. But when comparing it to its historical volatility, Microsoft is 1.0 times less risky than Small Cap. It trades about 0.05 of its potential returns per unit of risk. Small Cap Profund Small Cap is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  8,933  in Small Cap Profund Small Cap on September 16, 2024 and sell it today you would earn a total of  593.00  from holding Small Cap Profund Small Cap or generate 6.64% 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.  Small Cap Profund Small Cap

Microsoft

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 4 (%) 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.

Small Cap Profund

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Profund Small Cap are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Small Cap may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Microsoft and Small Cap

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

The idea behind Microsoft and Small Cap Profund Small Cap 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 Portfolio File Import module to quickly import all of your third-party portfolios from your local drive in csv format.