Can any of the company-specific risk be diversified away by investing in both Microsoft and Agilent Technologies 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 Agilent Technologies into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Microsoft and Agilent Technologies, you can compare the effects of market volatilities on Microsoft and Agilent Technologies 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 Agilent Technologies. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and Agilent Technologies.
Diversification Opportunities for Microsoft and Agilent Technologies
The 3 months correlation between Microsoft and Agilent is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Agilent Technologies in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Agilent Technologies 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 Agilent Technologies. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Agilent Technologies has no effect on the direction of Microsoft i.e., Microsoft and Agilent Technologies go up and down completely randomly.
Pair Corralation between Microsoft and Agilent Technologies
Given the investment horizon of 90 days Microsoft is expected to generate 0.99 times more return on investment than Agilent Technologies. However, Microsoft is 1.01 times less risky than Agilent Technologies. It trades about 0.03 of its potential returns per unit of risk. Agilent Technologies is currently generating about -0.01 per unit of risk. If you would invest 32,243 in Microsoft on September 5, 2023 and sell it today you would earn a total of 5,208 from holding Microsoft or generate 16.15% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile technical and fundamental indicators, Microsoft may actually be approaching a critical reversion point that can send shares even higher in January 2024.
Compared to the overall equity markets, risk-adjusted returns on investments in Agilent Technologies are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat inconsistent basic indicators, Agilent Technologies may actually be approaching a critical reversion point that can send shares even higher in January 2024.
Microsoft and Agilent Technologies Volatility Contrast
Predicted Return Density
Pair Trading with Microsoft and Agilent Technologies
The main advantage of trading using opposite Microsoft and Agilent Technologies positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, Agilent Technologies 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 Agilent Technologies will offset losses from the drop in Agilent Technologies' long position.
The idea behind Microsoft and Agilent Technologies 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.
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