Correlation Between PSI Software and Microchip Technology

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

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

Diversification Opportunities for PSI Software and Microchip Technology

0.74

Correlation Coefficient

PSI Software  Microchip Technology

Poor diversification

The 3 months correlation between PSI and Microchip is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding PSI Software AG and Microchip Technology Incorpora in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microchip Technology and PSI Software 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 PSI Software AG are associated (or correlated) with Microchip Technology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Microchip Technology has no effect on the direction of PSI Software i.e., PSI Software and Microchip Technology go up and down completely randomly.

Pair Corralation between PSI Software and Microchip Technology

Assuming the 90 days trading horizon PSI Software is expected to generate 1.38 times less return on investment than Microchip Technology. But when comparing it to its historical volatility, PSI Software AG is 1.02 times less risky than Microchip Technology. It trades about 0.01 of its potential returns per unit of risk. Microchip Technology Incorporated is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  6,228  in Microchip Technology Incorporated on September 14, 2024 and sell it today you would lose (308.00) from holding Microchip Technology Incorporated or give up 4.95% of portfolio value over 90 days.

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

PSI Software AG  vs.  Microchip Technology Incorpora

PSI Software AG

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days PSI Software AG has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, PSI Software is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Microchip Technology

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with PSI Software and Microchip Technology

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

The idea behind PSI Software AG and Microchip Technology Incorporated 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 Global Correlations module to find global opportunities by holding instruments from different markets.