Can any of the company-specific risk be diversified away by investing in both Apple 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 Apple and Microsoft into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Apple Inc and Microsoft, you can compare the effects of market volatilities on Apple 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 Apple with a short position of Microsoft. Check out your portfolio center. Please also check ongoing floating volatility patterns of Apple and Microsoft.
Diversification Opportunities for Apple and Microsoft
The 3 months correlation between Apple and Microsoft is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Apple Inc and Microsoft in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microsoft and Apple 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 Apple Inc 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 Apple i.e., Apple and Microsoft go up and down completely randomly.
Given the investment horizon of 90 days Apple Inc is expected to under-perform the Microsoft. In addition to that, Apple is 1.24 times more volatile than Microsoft. It trades about -0.36 of its total potential returns per unit of risk. Microsoft is currently generating about -0.24 per unit of volatility. If you would invest 33,355 in Microsoft on July 4, 2023 and sell it today you would lose (1,780) from holding Microsoft or give up 5.34% of portfolio value over 90 days.
Over the last 90 days Apple Inc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest unfluctuating performance, the Stock's basic indicators remain persistent and the latest mess on Wall Street may also be a sign of long-standing gains for the company institutional investors.
Over the last 90 days Microsoft has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable technical and fundamental indicators, Microsoft is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.
The main advantage of trading using opposite Apple and Microsoft positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Apple 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 Apple Inc 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.
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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.
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