Correlation Between Microsoft and Palo Alto

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

Diversification Opportunities for Microsoft and Palo Alto

0.45
  Correlation Coefficient

Very weak diversification

The 3 months correlation between Microsoft and Palo is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Palo Alto Networks in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Palo Alto Networks 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 Palo Alto. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Palo Alto Networks has no effect on the direction of Microsoft i.e., Microsoft and Palo Alto go up and down completely randomly.

Pair Corralation between Microsoft and Palo Alto

Given the investment horizon of 90 days Microsoft is expected to generate 0.53 times more return on investment than Palo Alto. However, Microsoft is 1.89 times less risky than Palo Alto. It trades about 0.24 of its potential returns per unit of risk. Palo Alto Networks is currently generating about 0.08 per unit of risk. If you would invest  42,700  in Microsoft on March 24, 2024 and sell it today you would earn a total of  2,278  from holding Microsoft or generate 5.33% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthWeak
Accuracy100.0%
ValuesDaily Returns

Microsoft  vs.  Palo Alto Networks

 Performance 
       Timeline  
Microsoft 

Risk-Adjusted Performance

7 of 100

 
Weak
 
Strong
OK
Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unsteady technical and fundamental indicators, Microsoft may actually be approaching a critical reversion point that can send shares even higher in July 2024.
Palo Alto Networks 

Risk-Adjusted Performance

8 of 100

 
Weak
 
Strong
OK
Compared to the overall equity markets, risk-adjusted returns on investments in Palo Alto Networks are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unsteady basic indicators, Palo Alto showed solid returns over the last few months and may actually be approaching a breakup point.

Microsoft and Palo Alto Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Microsoft and Palo Alto

The main advantage of trading using opposite Microsoft and Palo Alto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, Palo Alto 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 Palo Alto will offset losses from the drop in Palo Alto's long position.
The idea behind Microsoft and Palo Alto Networks 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .

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