Correlation Between Microsoft and Taiwan Semiconductor

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

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

Diversification Opportunities for Microsoft and Taiwan Semiconductor

0.58

Correlation Coefficient

Microsoft  Taiwan Semiconductor

Very weak diversification

The 3 months correlation between Microsoft and Taiwan is 0.58. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Taiwan Semiconductor Manufactu in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Taiwan Semiconductor 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 Taiwan Semiconductor. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Taiwan Semiconductor has no effect on the direction of Microsoft i.e., Microsoft and Taiwan Semiconductor go up and down completely randomly.

Pair Corralation between Microsoft and Taiwan Semiconductor

Assuming the 90 days trading horizon Microsoft is expected to under-perform the Taiwan Semiconductor. But the stock apears to be less risky and, when comparing its historical volatility, Microsoft is 2.13 times less risky than Taiwan Semiconductor. The stock trades about -0.13 of its potential returns per unit of risk. The Taiwan Semiconductor Manufacturing is currently generating about -0.04 of returns per unit of risk over similar time horizon. If you would invest  14,779  in Taiwan Semiconductor Manufacturing on November 30, 2024 and sell it today you would lose (1,545) from holding Taiwan Semiconductor Manufacturing or give up 10.45% of portfolio value over 90 days.

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

Microsoft  vs.  Taiwan Semiconductor Manufactu

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. Despite latest weak performance, the Stock's technical and fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Taiwan Semiconductor

Risk-Adjusted Performance

Very Weak

Over the last 90 days Taiwan Semiconductor Manufacturing has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's primary indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Microsoft and Taiwan Semiconductor

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

The idea behind Microsoft and Taiwan Semiconductor Manufacturing 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.