Can any of the company-specific risk be diversified away by investing in both Uber Technologies and Microsoft 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 Uber Technologies and Microsoft into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Uber Technologies and Microsoft, you can compare the effects of market volatilities on Uber Technologies and Microsoft 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 Uber Technologies with a short position of Microsoft. Check out your portfolio center. Please also check ongoing floating volatility patterns of Uber Technologies and Microsoft.
Diversification Opportunities for Uber Technologies and Microsoft
The 3 months correlation between Uber and Microsoft is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Uber Technologies and Microsoft in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microsoft and Uber Technologies 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 Uber Technologies are associated (or correlated) with Microsoft. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Microsoft has no effect on the direction of Uber Technologies i.e., Uber Technologies and Microsoft go up and down completely randomly.
Pair Corralation between Uber Technologies and Microsoft
Given the investment horizon of 90 days Uber Technologies is expected to generate 1.07 times more return on investment than Microsoft. However, Uber Technologies is 1.07 times more volatile than Microsoft. It trades about 0.82 of its potential returns per unit of risk. Microsoft is currently generating about 0.31 per unit of risk. If you would invest 4,648 in Uber Technologies on September 3, 2023 and sell it today you would earn a total of 1,087 from holding Uber Technologies or generate 23.39% return on investment over 90 days.
Compared to the overall equity markets, risk-adjusted returns on investments in Uber Technologies are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Even with relatively uncertain technical and fundamental indicators, Uber Technologies reported solid returns over the last few months and may actually be approaching a breakup point.
Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively conflicting technical and fundamental indicators, Microsoft may actually be approaching a critical reversion point that can send shares even higher in January 2024.
Uber Technologies and Microsoft Volatility Contrast
Predicted Return Density
Pair Trading with Uber Technologies and Microsoft
The main advantage of trading using opposite Uber Technologies and Microsoft positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Uber Technologies position performs unexpectedly, Microsoft 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 Microsoft will offset losses from the drop in Microsoft's long position.
The idea behind Uber Technologies and Microsoft 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 Portfolio Dashboard module to portfolio dashboard that provides centralized access to all your investments.
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