Correlation Between Microsoft and South32
Can any of the company-specific risk be diversified away by investing in both Microsoft and South32 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 South32 into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Microsoft and South32, you can compare the effects of market volatilities on Microsoft and South32 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 South32. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and South32.
Diversification Opportunities for Microsoft and South32
Significant diversification
The 3 months correlation between Microsoft and South32 is 0.09. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and South32 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on South32 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 South32. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of South32 has no effect on the direction of Microsoft i.e., Microsoft and South32 go up and down completely randomly.
Pair Corralation between Microsoft and South32
Given the investment horizon of 90 days Microsoft is expected to generate 1.4 times less return on investment than South32. But when comparing it to its historical volatility, Microsoft is 1.74 times less risky than South32. It trades about 0.06 of its potential returns per unit of risk. South32 is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest 304.00 in South32 on September 4, 2024 and sell it today you would earn a total of 64.00 from holding South32 or generate 21.05% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Insignificant |
| Accuracy | 98.8% |
| Values | Daily Returns |
Microsoft vs. South32
Performance |
| Timeline |
| Microsoft |
| South32 |
Microsoft and South32 Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Microsoft and South32
The main advantage of trading using opposite Microsoft and South32 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, South32 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 South32 will offset losses from the drop in South32's long position.| Microsoft vs. Palo Alto Networks | Microsoft vs. Uipath Inc | Microsoft vs. Block Inc | Microsoft vs. Adobe Systems Incorporated |
| South32 vs. Centaurus Metals | South32 vs. Retail Food Group | South32 vs. Super Retail Group | South32 vs. Dexus Convenience Retail |
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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.
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