Correlation Between Microsoft and Disney
Can any of the company-specific risk be diversified away by investing in both Microsoft and Disney 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 Disney into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Microsoft and Walt Disney, you can compare the effects of market volatilities on Microsoft and Disney 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 Disney. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and Disney.
Diversification Opportunities for Microsoft and Disney
Significant diversification
The 3 months correlation between Microsoft and Disney is 0.06. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Walt Disney in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Walt Disney 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 Disney. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Walt Disney has no effect on the direction of Microsoft i.e., Microsoft and Disney go up and down completely randomly.
Pair Corralation between Microsoft and Disney
Given the investment horizon of 90 days Microsoft is expected to generate 1.88 times less return on investment than Disney. But when comparing it to its historical volatility, Microsoft is 1.36 times less risky than Disney. It trades about 0.06 of its potential returns per unit of risk. Walt Disney is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest 8,336 in Walt Disney on September 1, 2024 and sell it today you would earn a total of 3,411 from holding Walt Disney or generate 40.92% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Microsoft vs. Walt Disney
Performance |
| Timeline |
| Microsoft |
| Walt Disney |
Microsoft and Disney Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Microsoft and Disney
The main advantage of trading using opposite Microsoft and Disney positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, Disney 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 Disney will offset losses from the drop in Disney's long position.| Microsoft vs. Palo Alto Networks | Microsoft vs. Uipath Inc | Microsoft vs. Block Inc | Microsoft vs. Adobe Systems Incorporated |
| Disney vs. ADTRAN Inc | Disney vs. Belden Inc | Disney vs. ADC Therapeutics SA | Disney vs. Comtech Telecommunications Corp |
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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.
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