Can any of the company-specific risk be diversified away by investing in both Veritone 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 Veritone and Microsoft into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Veritone and Microsoft, you can compare the effects of market volatilities on Veritone 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 Veritone with a short position of Microsoft. Check out your portfolio center. Please also check ongoing floating volatility patterns of Veritone and Microsoft.
Diversification Opportunities for Veritone and Microsoft
The 3 months correlation between Veritone and Microsoft is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Veritone and Microsoft in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microsoft and Veritone 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 Veritone 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 Veritone i.e., Veritone and Microsoft go up and down completely randomly.
Given the investment horizon of 90 days Veritone is expected to under-perform the Microsoft. In addition to that, Veritone is 2.98 times more volatile than Microsoft. It trades about -0.04 of its total potential returns per unit of risk. Microsoft is currently generating about 0.02 per unit of volatility. If you would invest 28,899 in Microsoft on July 2, 2023 and sell it today you would earn a total of 2,676 from holding Microsoft or generate 9.26% return on investment over 90 days.
Over the last 90 days Veritone has generated negative risk-adjusted returns adding no value to investors with long positions. Despite uncertain performance in the last few months, the Stock's basic indicators remain fairly strong which may send shares a bit higher in October 2023. The recent confusion may also be a sign of long-lasting up-swing for the firm traders.
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 current stock price uproar, may contribute to short-horizon losses for the private investors.
The main advantage of trading using opposite Veritone and Microsoft positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Veritone 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 Veritone 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 Global Correlations module to find global opportunities by holding instruments from different markets.
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