Correlation Between Microsoft and Deutsche Small

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

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

Diversification Opportunities for Microsoft and Deutsche Small

0.69

Correlation Coefficient

Microsoft  Deutsche Small

Poor diversification

The 3 months correlation between Microsoft and Deutsche is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Deutsche Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Deutsche Small Cap 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 Deutsche Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Deutsche Small Cap has no effect on the direction of Microsoft i.e., Microsoft and Deutsche Small go up and down completely randomly.

Pair Corralation between Microsoft and Deutsche Small

Given the investment horizon of 90 days Microsoft is expected to generate 1.97 times less return on investment than Deutsche Small. In addition to that, Microsoft is 1.64 times more volatile than Deutsche Small Cap. It trades about 0.05 of its total potential returns per unit of risk. Deutsche Small Cap is currently generating about 0.17 per unit of volatility. If you would invest  3,007  in Deutsche Small Cap on January 19, 2024 and sell it today you would earn a total of  112.00  from holding Deutsche Small Cap or generate 3.72% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	75.61%
Values	Daily Returns

Microsoft  vs.  Deutsche Small Cap

Microsoft

Risk-Adjusted Performance

4 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 4 (%) 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.

Deutsche Small Cap

Risk-Adjusted Performance

0 of 100

OK

Over the last 90 days Deutsche Small Cap has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly weak technical and fundamental indicators, Deutsche Small may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Pair Trading with Microsoft and Deutsche Small

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

The idea behind Microsoft and Deutsche Small Cap 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.