Correlation Between Microsoft and GM
Can any of the company-specific risk be diversified away by investing in both Microsoft and GM 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 GM into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Microsoft and General Motors, you can compare the effects of market volatilities on Microsoft and GM 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 GM. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and GM.
Diversification Opportunities for Microsoft and GM
Very poor diversification
The 3 months correlation between Microsoft and GM is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and General Motors in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on General Motors 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 GM. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of General Motors has no effect on the direction of Microsoft i.e., Microsoft and GM go up and down completely randomly.
Pair Corralation between Microsoft and GM
Given the investment horizon of 90 days Microsoft is expected to under-perform the GM. But the stock apears to be less risky and, when comparing its historical volatility, Microsoft is 1.58 times less risky than GM. The stock trades about -0.04 of its potential returns per unit of risk. The General Motors is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest 4,082 in General Motors on January 17, 2024 and sell it today you would earn a total of 187.00 from holding General Motors or generate 4.58% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Microsoft vs. General Motors
Performance |
| Timeline |
| Microsoft |
| General Motors |
Microsoft and GM Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Microsoft and GM
The main advantage of trading using opposite Microsoft and GM positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, GM 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 GM will offset losses from the drop in GM's long position.| Microsoft vs. Cloudflare | Microsoft vs. Okta Inc | Microsoft vs. Adobe Systems Incorporated | Microsoft vs. Nutanix |
| GM vs. Hycroft Mining Holding | GM vs. Exela Technologies | GM vs. Aquagold International | GM vs. Thrivent High Yield |
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.
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