Correlation Between Microsoft and Wells Fargo

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

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

Diversification Opportunities for Microsoft and Wells Fargo

0.89

Correlation Coefficient

Microsoft  Wells Fargo

Very poor diversification

The 3 months correlation between Microsoft and Wells is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Wells Fargo Endeavor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Wells Fargo Endeavor 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 Wells Fargo. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Wells Fargo Endeavor has no effect on the direction of Microsoft i.e., Microsoft and Wells Fargo go up and down completely randomly.

Pair Corralation between Microsoft and Wells Fargo

Given the investment horizon of 90 days Microsoft is expected to generate 1.11 times more return on investment than Wells Fargo. However, Microsoft is 1.11 times more volatile than Wells Fargo Endeavor. It trades about 0.08 of its potential returns per unit of risk. Wells Fargo Endeavor is currently generating about 0.07 per unit of risk. If you would invest  33,635  in Microsoft on January 24, 2024 and sell it today you would earn a total of  6,461  from holding Microsoft or generate 19.21% return on investment over 90 days.

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

Microsoft  vs.  Wells Fargo Endeavor

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.

Wells Fargo Endeavor

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Wells Fargo Endeavor are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Wells Fargo 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 Wells Fargo

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

The idea behind Microsoft and Wells Fargo Endeavor 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.