Correlation Between Microsoft and Shoprite Holdings

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

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

Diversification Opportunities for Microsoft and Shoprite Holdings

0.05

Correlation Coefficient

Microsoft  Shoprite Holdings

Significant diversification

The 3 months correlation between Microsoft and Shoprite is 0.05. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Shoprite Holdings Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Shoprite 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 Shoprite Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Shoprite Holdings has no effect on the direction of Microsoft i.e., Microsoft and Shoprite Holdings go up and down completely randomly.

Pair Corralation between Microsoft and Shoprite Holdings

Given the investment horizon of 90 days Microsoft is expected to generate 15.31 times less return on investment than Shoprite Holdings. But when comparing it to its historical volatility, Microsoft is 3.48 times less risky than Shoprite Holdings. It trades about 0.03 of its potential returns per unit of risk. Shoprite Holdings Limited is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  1,125  in Shoprite Holdings Limited on September 24, 2024 and sell it today you would earn a total of  435.00  from holding Shoprite Holdings Limited or generate 38.67% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	98.46%
Values	Daily Returns

Microsoft  vs.  Shoprite Holdings Limited

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.

Shoprite Holdings

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Shoprite Holdings Limited are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Shoprite Holdings reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Microsoft and Shoprite Holdings

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

The idea behind Microsoft and Shoprite Holdings Limited 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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.