Correlation Between Microsoft and New Wave
Can any of the company-specific risk be diversified away by investing in both Microsoft and New Wave 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 New Wave into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Microsoft and New Wave Holdings, you can compare the effects of market volatilities on Microsoft and New Wave 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 New Wave. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and New Wave.
Diversification Opportunities for Microsoft and New Wave
Very weak diversification
The 3 months correlation between Microsoft and New is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and New Wave Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on New Wave Holdings 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 New Wave. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of New Wave Holdings has no effect on the direction of Microsoft i.e., Microsoft and New Wave go up and down completely randomly.
Pair Corralation between Microsoft and New Wave
Given the investment horizon of 90 days Microsoft is expected to generate 32.53 times less return on investment than New Wave. But when comparing it to its historical volatility, Microsoft is 36.02 times less risky than New Wave. It trades about 0.08 of its potential returns per unit of risk. New Wave Holdings is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest 1.84 in New Wave Holdings on August 26, 2024 and sell it today you would lose (0.63) from holding New Wave Holdings or give up 34.24% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Microsoft vs. New Wave Holdings
Performance |
| Timeline |
| Microsoft |
| New Wave Holdings |
Microsoft and New Wave Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Microsoft and New Wave
The main advantage of trading using opposite Microsoft and New Wave positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, New Wave 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 New Wave will offset losses from the drop in New Wave'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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.
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