Correlation Between S A P and Microsoft
Can any of the company-specific risk be diversified away by investing in both S A P and Microsoft 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 S A P and Microsoft into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between SAP SE and Microsoft, you can compare the effects of market volatilities on S A P and Microsoft 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 S A P with a short position of Microsoft. Check out your portfolio center. Please also check ongoing floating volatility patterns of S A P and Microsoft.
Diversification Opportunities for S A P and Microsoft
Very poor diversification
The 3 months correlation between SAP and Microsoft is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding SAP SE and Microsoft in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microsoft and S A P 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 SAP SE are associated (or correlated) with Microsoft. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Microsoft has no effect on the direction of S A P i.e., S A P and Microsoft go up and down completely randomly.
Pair Corralation between S A P and Microsoft
Assuming the 90 days trading horizon S A P is expected to generate 3.41 times less return on investment than Microsoft. But when comparing it to its historical volatility, SAP SE is 1.53 times less risky than Microsoft. It trades about 0.03 of its potential returns per unit of risk. Microsoft is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest 39,496 in Microsoft on August 29, 2024 and sell it today you would earn a total of 1,149 from holding Microsoft or generate 2.91% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
SAP SE vs. Microsoft
Performance |
| Timeline |
| SAP SE |
| Microsoft |
S A P and Microsoft Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with S A P and Microsoft
The main advantage of trading using opposite S A P and Microsoft positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if S A P position performs unexpectedly, Microsoft 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 Microsoft will offset losses from the drop in Microsoft's long position.The idea behind SAP SE and Microsoft pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.| Microsoft vs. EPSILON HEALTHCARE LTD | Microsoft vs. HEALTHCARE REAL A | Microsoft vs. STORE ELECTRONIC | Microsoft vs. LPKF Laser Electronics |
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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.
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