Correlation Between Microsoft and Yellow Pages

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

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

Diversification Opportunities for Microsoft and Yellow Pages

0.56

Correlation Coefficient

Microsoft  Yellow Pages

Very weak diversification

The 3 months correlation between Microsoft and Yellow is 0.56. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Yellow Pages Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Yellow Pages Limited 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 Yellow Pages. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Yellow Pages Limited has no effect on the direction of Microsoft i.e., Microsoft and Yellow Pages go up and down completely randomly.

Pair Corralation between Microsoft and Yellow Pages

Given the investment horizon of 90 days Microsoft is expected to generate 0.71 times more return on investment than Yellow Pages. However, Microsoft is 1.4 times less risky than Yellow Pages. It trades about 0.22 of its potential returns per unit of risk. Yellow Pages Limited is currently generating about 0.04 per unit of risk. If you would invest  41,287  in Microsoft on September 22, 2024 and sell it today you would earn a total of  2,373  from holding Microsoft or generate 5.75% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	95.45%
Values	Daily Returns

Microsoft  vs.  Yellow Pages Limited

Microsoft

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 1 (%) 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.

Yellow Pages Limited

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Yellow Pages Limited are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating basic indicators, Yellow Pages displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Microsoft and Yellow Pages

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

The idea behind Microsoft and Yellow Pages Limited 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.