Correlation Between Imperial Brands and Microsoft

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Can any of the company-specific risk be diversified away by investing in both Imperial Brands 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 Imperial Brands and Microsoft into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Imperial Brands PLC and Microsoft, you can compare the effects of market volatilities on Imperial Brands 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 Imperial Brands with a short position of Microsoft. Check out your portfolio center. Please also check ongoing floating volatility patterns of Imperial Brands and Microsoft.

Diversification Opportunities for Imperial Brands and Microsoft

0.01
  Correlation Coefficient

Significant diversification

The 3 months correlation between Imperial and Microsoft is 0.01. Overlapping area represents the amount of risk that can be diversified away by holding Imperial Brands PLC and Microsoft in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microsoft and Imperial Brands 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 Imperial Brands PLC 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 Imperial Brands i.e., Imperial Brands and Microsoft go up and down completely randomly.

Pair Corralation between Imperial Brands and Microsoft

Assuming the 90 days horizon Imperial Brands PLC is expected to generate 0.62 times more return on investment than Microsoft. However, Imperial Brands PLC is 1.61 times less risky than Microsoft. It trades about 0.17 of its potential returns per unit of risk. Microsoft is currently generating about 0.02 per unit of risk. If you would invest  2,197  in Imperial Brands PLC on September 6, 2022 and sell it today you would earn a total of  394.00  from holding Imperial Brands PLC or generate 17.93% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthInsignificant
Accuracy100.0%
ValuesDaily Returns

Imperial Brands PLC  vs.  Microsoft

 Performance (%) 
       Timeline  
Imperial Brands PLC 
Imperial Performance
12 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Imperial Brands PLC are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of fairly abnormal fundamental drivers, Imperial Brands showed solid returns over the last few months and may actually be approaching a breakup point.

Imperial Price Channel

Microsoft 
Microsoft Performance
1 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable technical and fundamental indicators, Microsoft is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Microsoft Price Channel

Imperial Brands and Microsoft Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Imperial Brands and Microsoft

The main advantage of trading using opposite Imperial Brands and Microsoft positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Imperial Brands 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.
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The idea behind Imperial Brands PLC 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.
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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 Probability Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.

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