Correlation Between Microsoft and Small Cap
Can any of the company-specific risk be diversified away by investing in both Microsoft and Small Cap 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 Small Cap into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Microsoft and Small Cap Core, you can compare the effects of market volatilities on Microsoft and Small Cap 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 Small Cap. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and Small Cap.
Diversification Opportunities for Microsoft and Small Cap
Very good diversification
The 3 months correlation between Microsoft and Small is -0.22. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Small Cap Core in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Small Cap Core 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 Small Cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Small Cap Core has no effect on the direction of Microsoft i.e., Microsoft and Small Cap go up and down completely randomly.
Pair Corralation between Microsoft and Small Cap
Given the investment horizon of 90 days Microsoft is expected to generate 1.42 times less return on investment than Small Cap. But when comparing it to its historical volatility, Microsoft is 1.11 times less risky than Small Cap. It trades about 0.01 of its potential returns per unit of risk. Small Cap Core is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest 1,219 in Small Cap Core on November 3, 2024 and sell it today you would earn a total of 22.00 from holding Small Cap Core or generate 1.8% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 99.6% |
| Values | Daily Returns |
Microsoft vs. Small Cap Core
Performance |
| Timeline |
| Microsoft |
| Small Cap Core |
Microsoft and Small Cap Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Microsoft and Small Cap
The main advantage of trading using opposite Microsoft and Small Cap positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, Small Cap 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 Small Cap will offset losses from the drop in Small Cap's long position.| Microsoft vs. Palo Alto Networks | Microsoft vs. Uipath Inc | Microsoft vs. Adobe Systems Incorporated | Microsoft vs. Crowdstrike Holdings |
| Small Cap vs. Aqr Diversified Arbitrage | Small Cap vs. Allianzgi Diversified Income | Small Cap vs. Davenport Small Cap | Small Cap vs. Jhancock Diversified Macro |
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 Cryptocurrency Center module to build and monitor diversified portfolio of extremely risky digital assets and cryptocurrency.
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