Correlation Between Microsoft and CBOE Crude

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

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

Diversification Opportunities for Microsoft and CBOE Crude

-0.64

Correlation Coefficient

Microsoft  CBOE Crude

Excellent diversification

The 3 months correlation between Microsoft and CBOE is -0.64. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and CBOE Crude Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CBOE Crude Oil 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 CBOE Crude. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CBOE Crude Oil has no effect on the direction of Microsoft i.e., Microsoft and CBOE Crude go up and down completely randomly.

Pair Corralation between Microsoft and CBOE Crude

Given the investment horizon of 90 days Microsoft is expected to generate 1.65 times less return on investment than CBOE Crude. But when comparing it to its historical volatility, Microsoft is 5.85 times less risky than CBOE Crude. It trades about 0.05 of its potential returns per unit of risk. CBOE Crude Oil is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  3,372  in CBOE Crude Oil on September 19, 2024 and sell it today you would lose (301.00) from holding CBOE Crude Oil or give up 8.93% of portfolio value over 90 days.

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

Microsoft  vs.  CBOE Crude Oil

Pair Trading with Microsoft and CBOE Crude

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

The idea behind Microsoft and CBOE Crude Oil 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.