Correlation Between Microsoft and Challenger
Can any of the company-specific risk be diversified away by investing in both Microsoft and Challenger 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 Challenger into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Microsoft and Challenger, you can compare the effects of market volatilities on Microsoft and Challenger 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 Challenger. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and Challenger.
Diversification Opportunities for Microsoft and Challenger
-0.03 | Correlation Coefficient |
Good diversification
The 3 months correlation between Microsoft and Challenger is -0.03. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Challenger in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Challenger 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 Challenger. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Challenger has no effect on the direction of Microsoft i.e., Microsoft and Challenger go up and down completely randomly.
Pair Corralation between Microsoft and Challenger
Given the investment horizon of 90 days Microsoft is expected to generate 0.79 times more return on investment than Challenger. However, Microsoft is 1.27 times less risky than Challenger. It trades about 0.06 of its potential returns per unit of risk. Challenger is currently generating about 0.02 per unit of risk. If you would invest 32,302 in Microsoft on September 1, 2024 and sell it today you would earn a total of 10,044 from holding Microsoft or generate 31.09% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 98.67% |
| Values | Daily Returns |
Microsoft vs. Challenger
Performance |
| Timeline |
| Microsoft |
| Challenger |
Microsoft and Challenger Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Microsoft and Challenger
The main advantage of trading using opposite Microsoft and Challenger positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, Challenger 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 Challenger will offset losses from the drop in Challenger's long position.| Microsoft vs. Palo Alto Networks | Microsoft vs. Uipath Inc | Microsoft vs. Block Inc | Microsoft vs. Adobe Systems Incorporated |
| Challenger vs. Group 6 Metals | Challenger vs. Land Homes Group | Challenger vs. Sandon Capital Investments | Challenger vs. Clime Investment Management |
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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.
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