Correlation Between Microsoft and L Brands

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

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

Diversification Opportunities for Microsoft and L Brands

0.0

Correlation Coefficient

Microsoft  L Brands

Pay attention - limited upside

The 3 months correlation between Microsoft and L Brands is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and L Brands in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on L Brands 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 L Brands. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of L Brands has no effect on the direction of Microsoft i.e., Microsoft and L Brands go up and down completely randomly.

Pair Corralation between Microsoft and L Brands

If you would invest (100.00) in L Brands on February 2, 2024 and sell it today you would earn a total of  100.00  from holding L Brands or generate -100.0% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Flat
Strength	Insignificant
Accuracy	0.0%
Values	Daily Returns

Microsoft  vs.  L Brands

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. In spite of comparatively stable technical and fundamental indicators, Microsoft is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

L Brands

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days L Brands has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong fundamental drivers, L Brands is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Microsoft and L Brands

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

The idea behind Microsoft and L Brands 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.

Check out your portfolio center.

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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.