Correlation Between Microsoft and Target
Can any of the company-specific risk be diversified away by investing in both Microsoft and Target 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 Target into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Microsoft and Target, you can compare the effects of market volatilities on Microsoft and Target 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 Target. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and Target.
Diversification Opportunities for Microsoft and Target
Poor diversification
The 3 months correlation between Microsoft and Target is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Target in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Target 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 Target. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Target has no effect on the direction of Microsoft i.e., Microsoft and Target go up and down completely randomly.
Pair Corralation between Microsoft and Target
Given the investment horizon of 90 days Microsoft is expected to generate 0.92 times more return on investment than Target. However, Microsoft is 1.09 times less risky than Target. It trades about -0.14 of its potential returns per unit of risk. Target is currently generating about -0.18 per unit of risk. If you would invest 42,165 in Microsoft on January 26, 2024 and sell it today you would lose (1,259) from holding Microsoft or give up 2.99% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Microsoft vs. Target
Performance |
| Timeline |
| Microsoft |
| Target |
Microsoft and Target Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Microsoft and Target
The main advantage of trading using opposite Microsoft and Target positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, Target 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 Target will offset losses from the drop in Target's long position.| Microsoft vs. Palo Alto Networks | Microsoft vs. Uipath Inc | Microsoft vs. Block Inc | Microsoft vs. Adobe Systems Incorporated |
| Target vs. Costco Wholesale Corp | Target vs. BJs Wholesale Club | Target vs. Dollar Tree | Target vs. Dollar General |
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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.
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