Correlation Between Microsoft and Dropbox

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Can any of the company-specific risk be diversified away by investing in both Microsoft and Dropbox 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 Dropbox into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Microsoft and Dropbox, you can compare the effects of market volatilities on Microsoft and Dropbox 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 Dropbox. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and Dropbox.

Diversification Opportunities for Microsoft and Dropbox

-0.41
  Correlation Coefficient

Very good diversification

The 3 months correlation between Microsoft and Dropbox is -0.41. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Dropbox in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dropbox 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 Dropbox. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dropbox has no effect on the direction of Microsoft i.e., Microsoft and Dropbox go up and down completely randomly.

Pair Corralation between Microsoft and Dropbox

Given the investment horizon of 90 days Microsoft is expected to generate 1.31 times more return on investment than Dropbox. However, Microsoft is 1.31 times more volatile than Dropbox. It trades about 0.11 of its potential returns per unit of risk. Dropbox is currently generating about 0.09 per unit of risk. If you would invest  40,772  in Microsoft on December 30, 2023 and sell it today you would earn a total of  1,300  from holding Microsoft or generate 3.19% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthVery Weak
Accuracy100.0%
ValuesDaily Returns

Microsoft  vs.  Dropbox

 Performance 
       Timeline  
Microsoft 

Risk-Adjusted Performance

14 of 100

 
Low
 
High
Good
Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain technical and fundamental indicators, Microsoft unveiled solid returns over the last few months and may actually be approaching a breakup point.
Dropbox 

Risk-Adjusted Performance

0 of 100

 
Low
 
High
Very Weak
Over the last 90 days Dropbox has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of uncertain performance in the last few months, the Stock's fundamental drivers remain fairly strong which may send shares a bit higher in April 2024. The current disturbance may also be a sign of long term up-swing for the company investors.

Microsoft and Dropbox Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Microsoft and Dropbox

The main advantage of trading using opposite Microsoft and Dropbox positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, Dropbox 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 Dropbox will offset losses from the drop in Dropbox's long position.
The idea behind Microsoft and Dropbox 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.

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