Correlation Between Microsoft and New Focus

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

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

Diversification Opportunities for Microsoft and New Focus

-0.07

Correlation Coefficient

Microsoft  New Focus

Good diversification

The 3 months correlation between Microsoft and New is -0.07. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and New Focus Auto in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on New Focus Auto 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 New Focus. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of New Focus Auto has no effect on the direction of Microsoft i.e., Microsoft and New Focus go up and down completely randomly.

Pair Corralation between Microsoft and New Focus

Given the investment horizon of 90 days Microsoft is expected to generate 0.3 times more return on investment than New Focus. However, Microsoft is 3.39 times less risky than New Focus. It trades about -0.14 of its potential returns per unit of risk. New Focus Auto is currently generating about -0.21 per unit of risk. If you would invest  42,552  in Microsoft on February 5, 2024 and sell it today you would lose (1,886) from holding Microsoft or give up 4.43% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Microsoft  vs.  New Focus Auto

Microsoft

Risk-Adjusted Performance

0 of 100

Very Weak

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 latest stock price uproar, may contribute to short-horizon losses for the private investors.

New Focus Auto

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days New Focus Auto has generated negative risk-adjusted returns adding no value to investors with long positions. Despite uncertain performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in June 2024. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Microsoft and New Focus

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

The idea behind Microsoft and New Focus Auto 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.