Correlation Between Microsoft and WW Grainger

Can any of the company-specific risk be diversified away by investing in both Microsoft and WW Grainger 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 WW Grainger into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Microsoft and WW Grainger, you can compare the effects of market volatilities on Microsoft and WW Grainger 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 WW Grainger. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and WW Grainger.

Diversification Opportunities for Microsoft and WW Grainger

0.8

Correlation Coefficient

Microsoft  WW Grainger

Very poor diversification

The 3 months correlation between Microsoft and GWW is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and WW Grainger in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on WW Grainger 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 WW Grainger. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of WW Grainger has no effect on the direction of Microsoft i.e., Microsoft and WW Grainger go up and down completely randomly.

Pair Corralation between Microsoft and WW Grainger

Given the investment horizon of 90 days Microsoft is expected to generate 0.87 times more return on investment than WW Grainger. However, Microsoft is 1.16 times less risky than WW Grainger. It trades about -0.14 of its potential returns per unit of risk. WW Grainger is currently generating about -0.19 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	Strong
Accuracy	100.0%
Values	Daily Returns

Microsoft  vs.  WW Grainger

Microsoft

Risk-Adjusted Performance

1 of 100

Weak

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.

WW Grainger

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in WW Grainger are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly inconsistent basic indicators, WW Grainger may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Pair Trading with Microsoft and WW Grainger

The main advantage of trading using opposite Microsoft and WW Grainger positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, WW Grainger 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 WW Grainger will offset losses from the drop in WW Grainger's long position.

The idea behind Microsoft and WW Grainger 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 Stock Screener module to find equities using a custom stock filter or screen asymmetry in trading patterns, price, volume, or investment outlook..