Correlation Between Microsoft and Netflix
Can any of the company-specific risk be diversified away by investing in both Microsoft and Netflix 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 Netflix into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Microsoft and Netflix, you can compare the effects of market volatilities on Microsoft and Netflix 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 Netflix. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and Netflix.
Diversification Opportunities for Microsoft and Netflix
Poor diversification
The 3 months correlation between Microsoft and Netflix is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Netflix in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Netflix 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 Netflix. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Netflix has no effect on the direction of Microsoft i.e., Microsoft and Netflix go up and down completely randomly.
Pair Corralation between Microsoft and Netflix
Assuming the 90 days horizon Microsoft is expected to generate 2.05 times less return on investment than Netflix. But when comparing it to its historical volatility, Microsoft is 1.53 times less risky than Netflix. It trades about 0.08 of its potential returns per unit of risk. Netflix is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest 29,760 in Netflix on August 25, 2024 and sell it today you would earn a total of 55,920 from holding Netflix or generate 187.9% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Microsoft vs. Netflix
Performance |
| Timeline |
| Microsoft |
| Netflix |
Microsoft and Netflix Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Microsoft and Netflix
The main advantage of trading using opposite Microsoft and Netflix positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, Netflix 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 Netflix will offset losses from the drop in Netflix's long position.The idea behind Microsoft and Netflix 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.| Netflix vs. INTERCONT HOTELS | Netflix vs. Electronic Arts | Netflix vs. Hyatt Hotels | Netflix vs. Wyndham Hotels Resorts |
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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..
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