Correlation Between Microsoft and LHC

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

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

Diversification Opportunities for Microsoft and LHC

-0.34

Correlation Coefficient

Microsoft  LHC

Very good diversification

The 3 months correlation between Microsoft and LHC is -0.34. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and LHC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LHC 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 LHC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LHC has no effect on the direction of Microsoft i.e., Microsoft and LHC go up and down completely randomly.

Pair Corralation between Microsoft and LHC

Given the investment horizon of 90 days Microsoft is expected to generate 1.1 times more return on investment than LHC. However, Microsoft is 1.1 times more volatile than LHC. It trades about 0.01 of its potential returns per unit of risk. LHC is currently generating about -0.07 per unit of risk. If you would invest  42,944  in Microsoft on September 28, 2024 and sell it today you would earn a total of  126.00  from holding Microsoft or generate 0.29% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	96.83%
Values	Daily Returns

Microsoft  vs.  LHC

Microsoft

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days Microsoft has generated negative risk-adjusted returns adding no value to investors with long positions. 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.

LHC

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days LHC has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy fundamental indicators, LHC is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Microsoft and LHC

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

The idea behind Microsoft and LHC 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 Sync Your Broker module to sync your existing holdings, watchlists, positions or portfolios from thousands of online brokerage services, banks, investment account aggregators and robo-advisors..