Correlation Between Microsoft and ARCA Biotechnology

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

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

Diversification Opportunities for Microsoft and ARCA Biotechnology

0.3

Correlation Coefficient

Microsoft  ARCA Biotechnology

Weak diversification

The 3 months correlation between Microsoft and ARCA is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and ARCA Biotechnology in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ARCA Biotechnology 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 ARCA Biotechnology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ARCA Biotechnology has no effect on the direction of Microsoft i.e., Microsoft and ARCA Biotechnology go up and down completely randomly.

Pair Corralation between Microsoft and ARCA Biotechnology

Given the investment horizon of 90 days Microsoft is expected to generate 1.02 times more return on investment than ARCA Biotechnology. However, Microsoft is 1.02 times more volatile than ARCA Biotechnology. It trades about 0.21 of its potential returns per unit of risk. ARCA Biotechnology is currently generating about 0.01 per unit of risk. If you would invest  41,466  in Microsoft on September 21, 2024 and sell it today you would earn a total of  2,237  from holding Microsoft or generate 5.39% return on investment over 90 days.

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

Microsoft  vs.  ARCA Biotechnology

Pair Trading with Microsoft and ARCA Biotechnology

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

The idea behind Microsoft and ARCA Biotechnology 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.