Correlation Between Microsoft and Texas Instruments

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

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

Diversification Opportunities for Microsoft and Texas Instruments

0.39

Correlation Coefficient

Microsoft  Texas Instruments

Weak diversification

The 3 months correlation between Microsoft and Texas is 0.39. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Texas Instruments Incorporated in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Texas Instruments 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 Texas Instruments. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Texas Instruments has no effect on the direction of Microsoft i.e., Microsoft and Texas Instruments go up and down completely randomly.

Pair Corralation between Microsoft and Texas Instruments

Given the investment horizon of 90 days Microsoft is expected to under-perform the Texas Instruments. But the stock apears to be less risky and, when comparing its historical volatility, Microsoft is 1.65 times less risky than Texas Instruments. The stock trades about -0.17 of its potential returns per unit of risk. The Texas Instruments Incorporated is currently generating about -0.08 of returns per unit of risk over similar time horizon. If you would invest  17,085  in Texas Instruments Incorporated on January 25, 2024 and sell it today you would lose (538.00) from holding Texas Instruments Incorporated or give up 3.15% of portfolio value over 90 days.

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

Microsoft  vs.  Texas Instruments Incorporated

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.

Texas Instruments

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Texas Instruments Incorporated has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Texas Instruments is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Microsoft and Texas Instruments

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

The idea behind Microsoft and Texas Instruments Incorporated 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.