Correlation Between Microsoft and Crocs

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

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

Diversification Opportunities for Microsoft and Crocs

0.6

Correlation Coefficient

Microsoft  Crocs

Poor diversification

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

Pair Corralation between Microsoft and Crocs

Assuming the 90 days trading horizon Microsoft is expected to generate 0.8 times more return on investment than Crocs. However, Microsoft is 1.25 times less risky than Crocs. It trades about -0.07 of its potential returns per unit of risk. Crocs Inc is currently generating about -0.43 per unit of risk. If you would invest  39,050  in Microsoft on January 30, 2024 and sell it today you would lose (875.00) from holding Microsoft or give up 2.24% of portfolio value over 90 days.

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

Microsoft  vs.  Crocs Inc

Microsoft

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy technical and fundamental indicators, Microsoft is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Crocs Inc

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Crocs Inc are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile basic indicators, Crocs exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Microsoft and Crocs

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

The idea behind Microsoft and Crocs Inc 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.