Correlation Between Microsoft and Unilever PLC

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

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

Diversification Opportunities for Microsoft and Unilever PLC

-0.01

Correlation Coefficient

Microsoft  Unilever PLC

Good diversification

The 3 months correlation between Microsoft and Unilever is -0.01. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Unilever PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Unilever PLC 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 Unilever PLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Unilever PLC has no effect on the direction of Microsoft i.e., Microsoft and Unilever PLC go up and down completely randomly.

Pair Corralation between Microsoft and Unilever PLC

Given the investment horizon of 90 days Microsoft is expected to generate 1.52 times more return on investment than Unilever PLC. However, Microsoft is 1.52 times more volatile than Unilever PLC. It trades about 0.01 of its potential returns per unit of risk. Unilever PLC is currently generating about -0.07 per unit of risk. If you would invest  43,781  in Microsoft on September 19, 2024 and sell it today you would lose (42.00) 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	98.46%
Values	Daily Returns

Microsoft  vs.  Unilever PLC

Microsoft

Risk-Adjusted Performance

0 of 100

Insignificant

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.

Unilever PLC

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Unilever PLC has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Unilever PLC is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Microsoft and Unilever PLC

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

The idea behind Microsoft and Unilever PLC 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.