Correlation Between Microsoft and Principal Financial

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

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

Diversification Opportunities for Microsoft and Principal Financial

0.6

Correlation Coefficient

Microsoft  Principal Financial

Poor diversification

The 3 months correlation between Microsoft and Principal is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Principal Financial Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Principal Financial 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 Principal Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Principal Financial has no effect on the direction of Microsoft i.e., Microsoft and Principal Financial go up and down completely randomly.

Pair Corralation between Microsoft and Principal Financial

Given the investment horizon of 90 days Microsoft is expected to under-perform the Principal Financial. In addition to that, Microsoft is 1.19 times more volatile than Principal Financial Group. It trades about -0.11 of its total potential returns per unit of risk. Principal Financial Group is currently generating about -0.02 per unit of volatility. If you would invest  7,998  in Principal Financial Group on February 1, 2024 and sell it today you would lose (84.00) from holding Principal Financial Group or give up 1.05% of portfolio value over 90 days.

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

Microsoft  vs.  Principal Financial Group

Microsoft

Risk-Adjusted Performance

0 of 100

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.

Principal Financial

Risk-Adjusted Performance

5 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Principal Financial Group are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable technical and fundamental indicators, Principal Financial is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Microsoft and Principal Financial

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

The idea behind Microsoft and Principal Financial Group 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.