Correlation Between Microsoft and Plumb Balanced

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

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

Diversification Opportunities for Microsoft and Plumb Balanced

0.79

Correlation Coefficient

Microsoft  Plumb Balanced

Poor diversification

The 3 months correlation between Microsoft and Plumb is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Plumb Balanced in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Plumb Balanced 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 Plumb Balanced. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Plumb Balanced has no effect on the direction of Microsoft i.e., Microsoft and Plumb Balanced go up and down completely randomly.

Pair Corralation between Microsoft and Plumb Balanced

Given the investment horizon of 90 days Microsoft is expected to under-perform the Plumb Balanced. In addition to that, Microsoft is 1.89 times more volatile than Plumb Balanced. It trades about -0.04 of its total potential returns per unit of risk. Plumb Balanced is currently generating about -0.01 per unit of volatility. If you would invest  3,649  in Plumb Balanced on January 24, 2024 and sell it today you would lose (14.00) from holding Plumb Balanced or give up 0.38% of portfolio value over 90 days.

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

Microsoft  vs.  Plumb Balanced

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.

Plumb Balanced

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Plumb Balanced are ranked lower than 7 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental drivers, Plumb Balanced is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Microsoft and Plumb Balanced

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

The idea behind Microsoft and Plumb Balanced 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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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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.