Correlation Between Microsoft and Best Buy
Can any of the company-specific risk be diversified away by investing in both Microsoft and Best Buy 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 Best Buy into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Microsoft and Best Buy Co, you can compare the effects of market volatilities on Microsoft and Best Buy 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 Best Buy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and Best Buy.
Diversification Opportunities for Microsoft and Best Buy
Poor diversification
The 3 months correlation between Microsoft and Best is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Best Buy Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Best Buy 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 Best Buy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Best Buy has no effect on the direction of Microsoft i.e., Microsoft and Best Buy go up and down completely randomly.
Pair Corralation between Microsoft and Best Buy
Given the investment horizon of 90 days Microsoft is expected to generate 0.67 times more return on investment than Best Buy. However, Microsoft is 1.48 times less risky than Best Buy. It trades about -0.15 of its potential returns per unit of risk. Best Buy Co is currently generating about -0.25 per unit of risk. If you would invest 42,286 in Microsoft on January 25, 2024 and sell it today you would lose (1,380) from holding Microsoft or give up 3.26% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Microsoft vs. Best Buy Co
Performance |
| Timeline |
| Microsoft |
| Best Buy |
Microsoft and Best Buy Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Microsoft and Best Buy
The main advantage of trading using opposite Microsoft and Best Buy positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, Best Buy 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 Best Buy will offset losses from the drop in Best Buy'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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.
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