Correlation Between NVIDIA and Microsoft

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

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

Diversification Opportunities for NVIDIA and Microsoft

-0.47

Correlation Coefficient

NVIDIA  Microsoft

Very good diversification

The 3 months correlation between NVIDIA and Microsoft is -0.47. Overlapping area represents the amount of risk that can be diversified away by holding NVIDIA and Microsoft in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microsoft and NVIDIA 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 NVIDIA are associated (or correlated) with Microsoft. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Microsoft has no effect on the direction of NVIDIA i.e., NVIDIA and Microsoft go up and down completely randomly.

Pair Corralation between NVIDIA and Microsoft

Assuming the 90 days trading horizon NVIDIA is expected to generate 1.63 times more return on investment than Microsoft. However, NVIDIA is 1.63 times more volatile than Microsoft. It trades about 0.07 of its potential returns per unit of risk. Microsoft is currently generating about -0.11 per unit of risk. If you would invest  576,000  in NVIDIA on September 4, 2024 and sell it today you would earn a total of  56,000  from holding NVIDIA or generate 9.72% return on investment over 90 days.

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

NVIDIA  vs.  Microsoft

NVIDIA

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in NVIDIA are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, NVIDIA may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Microsoft

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Microsoft has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with NVIDIA and Microsoft

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

The idea behind NVIDIA and Microsoft 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.