Correlation Between Microsoft and Alibaba Group

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

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

Diversification Opportunities for Microsoft and Alibaba Group

-0.04

Correlation Coefficient

Microsoft  Alibaba Group

Good diversification

The 3 months correlation between Microsoft and Alibaba is -0.04. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Alibaba Group Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Alibaba Group Holdings 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 Alibaba Group. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Alibaba Group Holdings has no effect on the direction of Microsoft i.e., Microsoft and Alibaba Group go up and down completely randomly.

Pair Corralation between Microsoft and Alibaba Group

Assuming the 90 days horizon Microsoft is expected to generate 3.56 times less return on investment than Alibaba Group. But when comparing it to its historical volatility, Microsoft is 1.66 times less risky than Alibaba Group. It trades about 0.03 of its potential returns per unit of risk. Alibaba Group Holdings is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  7,263  in Alibaba Group Holdings on September 3, 2024 and sell it today you would earn a total of  1,007  from holding Alibaba Group Holdings or generate 13.86% return on investment over 90 days.

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

Microsoft  vs.  Alibaba Group Holdings

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. Despite nearly fragile basic indicators, Microsoft may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Alibaba Group Holdings

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Alibaba Group Holdings are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile essential indicators, Alibaba Group may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Microsoft and Alibaba Group

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

The idea behind Microsoft and Alibaba Group Holdings 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.