Correlation Between Microsoft and Dodge Cox

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

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

Diversification Opportunities for Microsoft and Dodge Cox

0.2

Correlation Coefficient

Microsoft  Dodge Cox

Modest diversification

The 3 months correlation between Microsoft and Dodge is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Dodge International Stock in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dodge International Stock 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 Dodge Cox. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dodge International Stock has no effect on the direction of Microsoft i.e., Microsoft and Dodge Cox go up and down completely randomly.

Pair Corralation between Microsoft and Dodge Cox

Given the investment horizon of 90 days Microsoft is expected to generate 1.62 times more return on investment than Dodge Cox. However, Microsoft is 1.62 times more volatile than Dodge International Stock. It trades about 0.06 of its potential returns per unit of risk. Dodge International Stock is currently generating about 0.05 per unit of risk. If you would invest  32,151  in Microsoft on August 31, 2024 and sell it today you would earn a total of  10,195  from holding Microsoft or generate 31.71% return on investment over 90 days.

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

Microsoft  vs.  Dodge International Stock

Microsoft

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. 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.

Dodge International Stock

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Dodge International Stock has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong technical and fundamental indicators, Dodge Cox is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Microsoft and Dodge Cox

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

The idea behind Microsoft and Dodge International Stock 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.