Correlation Between Microsoft and Lennar
Can any of the company-specific risk be diversified away by investing in both Microsoft and Lennar 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 Lennar into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Microsoft and Lennar, you can compare the effects of market volatilities on Microsoft and Lennar 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 Lennar. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and Lennar.
Diversification Opportunities for Microsoft and Lennar
Average diversification
The 3 months correlation between Microsoft and Lennar is 0.16. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Lennar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lennar 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 Lennar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lennar has no effect on the direction of Microsoft i.e., Microsoft and Lennar go up and down completely randomly.
Pair Corralation between Microsoft and Lennar
Given the investment horizon of 90 days Microsoft is expected to generate 1.71 times less return on investment than Lennar. But when comparing it to its historical volatility, Microsoft is 1.45 times less risky than Lennar. It trades about 0.06 of its potential returns per unit of risk. Lennar is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest 10,378 in Lennar on August 31, 2024 and sell it today you would earn a total of 6,198 from holding Lennar or generate 59.72% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Insignificant |
| Accuracy | 98.16% |
| Values | Daily Returns |
Microsoft vs. Lennar
Performance |
| Timeline |
| Microsoft |
| Lennar |
Microsoft and Lennar Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Microsoft and Lennar
The main advantage of trading using opposite Microsoft and Lennar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, Lennar 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 Lennar will offset losses from the drop in Lennar's long position.| Microsoft vs. Palo Alto Networks | Microsoft vs. Uipath Inc | Microsoft vs. Block Inc | Microsoft vs. Adobe Systems Incorporated |
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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.
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