Correlation Between Microsoft and Ross Stores

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

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

Diversification Opportunities for Microsoft and Ross Stores

0.78

Correlation Coefficient

Microsoft  Ross Stores

Poor diversification

The 3 months correlation between Microsoft and Ross is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Ross Stores in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ross Stores 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 Ross Stores. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ross Stores has no effect on the direction of Microsoft i.e., Microsoft and Ross Stores go up and down completely randomly.

Pair Corralation between Microsoft and Ross Stores

Assuming the 90 days trading horizon Microsoft is expected to generate 1.33 times less return on investment than Ross Stores. But when comparing it to its historical volatility, Microsoft is 1.33 times less risky than Ross Stores. It trades about 0.09 of its potential returns per unit of risk. Ross Stores is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  13,426  in Ross Stores on September 29, 2024 and sell it today you would earn a total of  1,292  from holding Ross Stores or generate 9.62% return on investment over 90 days.

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

Microsoft  vs.  Ross Stores

Microsoft

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unsteady technical and fundamental indicators, Microsoft may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Ross Stores

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Ross Stores are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Ross Stores may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Microsoft and Ross Stores

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

The idea behind Microsoft and Ross Stores 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.