Correlation Between Microsoft and Wipro
Can any of the company-specific risk be diversified away by investing in both Microsoft and Wipro 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 Wipro into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Microsoft and Wipro, you can compare the effects of market volatilities on Microsoft and Wipro 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 Wipro. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and Wipro.
Diversification Opportunities for Microsoft and Wipro
Very poor diversification
The 3 months correlation between Microsoft and Wipro is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Wipro in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wipro 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 Wipro. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wipro has no effect on the direction of Microsoft i.e., Microsoft and Wipro go up and down completely randomly.
Pair Corralation between Microsoft and Wipro
Assuming the 90 days trading horizon Microsoft is expected to generate 0.69 times more return on investment than Wipro. However, Microsoft is 1.44 times less risky than Wipro. It trades about 0.1 of its potential returns per unit of risk. Wipro is currently generating about 0.06 per unit of risk. If you would invest 21,980 in Microsoft on September 15, 2024 and sell it today you would earn a total of 20,935 from holding Microsoft or generate 95.25% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Microsoft vs. Wipro
Performance |
| Timeline |
| Microsoft |
| Wipro |
Microsoft and Wipro Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Microsoft and Wipro
The main advantage of trading using opposite Microsoft and Wipro positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, Wipro 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 Wipro will offset losses from the drop in Wipro's long position.The idea behind Microsoft and Wipro 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.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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