Correlation Between Vanguard World and Microsoft

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

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

Diversification Opportunities for Vanguard World and Microsoft

-0.41

Correlation Coefficient

Vanguard World  Microsoft

Very good diversification

The 3 months correlation between Vanguard and Microsoft is -0.41. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard World and Microsoft in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microsoft and Vanguard World 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 Vanguard World are associated (or correlated) with Microsoft. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Microsoft has no effect on the direction of Vanguard World i.e., Vanguard World and Microsoft go up and down completely randomly.

Pair Corralation between Vanguard World and Microsoft

Assuming the 90 days trading horizon Vanguard World is expected to generate 4.28 times less return on investment than Microsoft. But when comparing it to its historical volatility, Vanguard World is 1.63 times less risky than Microsoft. It trades about 0.04 of its potential returns per unit of risk. Microsoft is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  441,363  in Microsoft on October 4, 2024 and sell it today you would earn a total of  420,137  from holding Microsoft or generate 95.19% return on investment over 90 days.

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

Vanguard World  vs.  Microsoft

Vanguard World

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vanguard World has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Vanguard World is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Microsoft

Risk-Adjusted Performance

6 of 100

Modest

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

Pair Trading with Vanguard World and Microsoft

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

The idea behind Vanguard World and Microsoft 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.