Correlation Between Microsoft and Amazon
Can any of the company-specific risk be diversified away by investing in both Microsoft and Amazon 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 Amazon into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Microsoft and Amazon Inc, you can compare the effects of market volatilities on Microsoft and Amazon 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 Amazon. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and Amazon.
Diversification Opportunities for Microsoft and Amazon
Poor diversification
The 3 months correlation between Microsoft and Amazon is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Amazon Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Amazon Inc 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 Amazon. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Amazon Inc has no effect on the direction of Microsoft i.e., Microsoft and Amazon go up and down completely randomly.
Pair Corralation between Microsoft and Amazon
Assuming the 90 days trading horizon Microsoft is expected to generate 1.49 times less return on investment than Amazon. But when comparing it to its historical volatility, Microsoft is 1.28 times less risky than Amazon. It trades about 0.08 of its potential returns per unit of risk. Amazon Inc is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest 8,414 in Amazon Inc on August 28, 2024 and sell it today you would earn a total of 10,692 from holding Amazon Inc or generate 127.07% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Microsoft vs. Amazon Inc
Performance |
| Timeline |
| Microsoft |
| Amazon Inc |
Microsoft and Amazon Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Microsoft and Amazon
The main advantage of trading using opposite Microsoft and Amazon positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, Amazon 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 Amazon will offset losses from the drop in Amazon's long position.| Microsoft vs. Media and Games | Microsoft vs. Martin Marietta Materials | Microsoft vs. Summit Materials | Microsoft vs. Vulcan Materials |
| Amazon vs. Big 5 Sporting | Amazon vs. Gold Road Resources | Amazon vs. Fukuyama Transporting Co | Amazon vs. Gaztransport Technigaz SA |
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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.
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