Correlation Between Microsoft and F1RA34

Can any of the company-specific risk be diversified away by investing in both Microsoft and F1RA34 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 F1RA34 into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Microsoft and F1RA34, you can compare the effects of market volatilities on Microsoft and F1RA34 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 F1RA34. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and F1RA34.

Diversification Opportunities for Microsoft and F1RA34

0.86

Correlation Coefficient

Microsoft  F1RA34

Very poor diversification

The 3 months correlation between Microsoft and F1RA34 is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and F1RA34 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on F1RA34 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 F1RA34. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of F1RA34 has no effect on the direction of Microsoft i.e., Microsoft and F1RA34 go up and down completely randomly.

Pair Corralation between Microsoft and F1RA34

Assuming the 90 days trading horizon Microsoft is expected to generate 0.86 times more return on investment than F1RA34. However, Microsoft is 1.17 times less risky than F1RA34. It trades about 0.1 of its potential returns per unit of risk. F1RA34 is currently generating about 0.01 per unit of risk. If you would invest  5,261  in Microsoft on September 23, 2024 and sell it today you would earn a total of  5,825  from holding Microsoft or generate 110.72% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.8%
Values	Daily Returns

Microsoft  vs.  F1RA34

Microsoft

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak technical and fundamental indicators, Microsoft may actually be approaching a critical reversion point that can send shares even higher in January 2025.

F1RA34

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in F1RA34 are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, F1RA34 sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Microsoft and F1RA34

The main advantage of trading using opposite Microsoft and F1RA34 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, F1RA34 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 F1RA34 will offset losses from the drop in F1RA34's long position.

The idea behind Microsoft and F1RA34 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.