Correlation Between Microsoft and China Merchants

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

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

Diversification Opportunities for Microsoft and China Merchants

-0.27

Correlation Coefficient

Microsoft  China Merchants

Very good diversification

The 3 months correlation between Microsoft and China is -0.27. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and China Merchants Port in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Merchants Port 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 China Merchants. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Merchants Port has no effect on the direction of Microsoft i.e., Microsoft and China Merchants go up and down completely randomly.

Pair Corralation between Microsoft and China Merchants

Given the investment horizon of 90 days Microsoft is expected to generate 1.08 times more return on investment than China Merchants. However, Microsoft is 1.08 times more volatile than China Merchants Port. It trades about 0.0 of its potential returns per unit of risk. China Merchants Port is currently generating about -0.22 per unit of risk. If you would invest  43,098  in Microsoft on October 1, 2024 and sell it today you would lose (45.00) from holding Microsoft or give up 0.1% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	95.24%
Values	Daily Returns

Microsoft  vs.  China Merchants Port

Microsoft

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. 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.

China Merchants Port

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in China Merchants Port are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile technical indicators, China Merchants may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Microsoft and China Merchants

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

The idea behind Microsoft and China Merchants Port 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.