Correlation Between Microsoft and CECO ENVIRONMENTAL

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

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

Diversification Opportunities for Microsoft and CECO ENVIRONMENTAL

0.75

Correlation Coefficient

Microsoft  CECO ENVIRONMENTAL

Poor diversification

The 3 months correlation between Microsoft and CECO is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and CECO ENVIRONMENTAL in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CECO ENVIRONMENTAL 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 CECO ENVIRONMENTAL. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CECO ENVIRONMENTAL has no effect on the direction of Microsoft i.e., Microsoft and CECO ENVIRONMENTAL go up and down completely randomly.

Pair Corralation between Microsoft and CECO ENVIRONMENTAL

Assuming the 90 days trading horizon Microsoft is expected to generate 1.46 times less return on investment than CECO ENVIRONMENTAL. But when comparing it to its historical volatility, Microsoft is 2.61 times less risky than CECO ENVIRONMENTAL. It trades about 0.1 of its potential returns per unit of risk. CECO ENVIRONMENTAL is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  2,550  in CECO ENVIRONMENTAL on September 25, 2024 and sell it today you would earn a total of  256.00  from holding CECO ENVIRONMENTAL or generate 10.04% return on investment over 90 days.

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

Microsoft  vs.  CECO ENVIRONMENTAL

Microsoft

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile technical and fundamental indicators, Microsoft may actually be approaching a critical reversion point that can send shares even higher in January 2025.

CECO ENVIRONMENTAL

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in CECO ENVIRONMENTAL are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, CECO ENVIRONMENTAL unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Microsoft and CECO ENVIRONMENTAL

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

The idea behind Microsoft and CECO ENVIRONMENTAL 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.