Correlation Between Microsoft and CNH Industrial
Can any of the company-specific risk be diversified away by investing in both Microsoft and CNH Industrial 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 CNH Industrial into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Microsoft and CNH Industrial NV, you can compare the effects of market volatilities on Microsoft and CNH Industrial 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 CNH Industrial. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and CNH Industrial.
Diversification Opportunities for Microsoft and CNH Industrial
0.61 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Microsoft and CNH is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and CNH Industrial NV in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CNH Industrial NV 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 CNH Industrial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CNH Industrial NV has no effect on the direction of Microsoft i.e., Microsoft and CNH Industrial go up and down completely randomly.
Pair Corralation between Microsoft and CNH Industrial
Assuming the 90 days trading horizon Microsoft is expected to generate 4.74 times less return on investment than CNH Industrial. But when comparing it to its historical volatility, Microsoft is 1.55 times less risky than CNH Industrial. It trades about 0.03 of its potential returns per unit of risk. CNH Industrial NV is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest 935.00 in CNH Industrial NV on September 3, 2024 and sell it today you would earn a total of 227.00 from holding CNH Industrial NV or generate 24.28% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Microsoft vs. CNH Industrial NV
Performance |
| Timeline |
| Microsoft |
| CNH Industrial NV |
Microsoft and CNH Industrial Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Microsoft and CNH Industrial
The main advantage of trading using opposite Microsoft and CNH Industrial positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, CNH Industrial 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 CNH Industrial will offset losses from the drop in CNH Industrial's long position.The idea behind Microsoft and CNH Industrial NV 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.| CNH Industrial vs. TOTAL GABON | CNH Industrial vs. Walgreens Boots Alliance | CNH Industrial vs. Peak Resources Limited |
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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.
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