Correlation Between Microsoft and Lam Research

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

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

Diversification Opportunities for Microsoft and Lam Research

0.64

Correlation Coefficient

Microsoft  Lam Research

Poor diversification

The 3 months correlation between Microsoft and Lam is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Lam Research Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lam Research Corp 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 Lam Research. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lam Research Corp has no effect on the direction of Microsoft i.e., Microsoft and Lam Research go up and down completely randomly.

Pair Corralation between Microsoft and Lam Research

Given the investment horizon of 90 days Microsoft is expected to under-perform the Lam Research. But the stock apears to be less risky and, when comparing its historical volatility, Microsoft is 1.58 times less risky than Lam Research. The stock trades about -0.13 of its potential returns per unit of risk. The Lam Research Corp is currently generating about -0.08 of returns per unit of risk over similar time horizon. If you would invest  96,726  in Lam Research Corp on February 6, 2024 and sell it today you would lose (4,256) from holding Lam Research Corp or give up 4.4% of portfolio value over 90 days.

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

Microsoft  vs.  Lam Research Corp

Microsoft

Risk-Adjusted Performance

0 of 100

Very 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.

Lam Research Corp

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Lam Research Corp are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unfluctuating fundamental indicators, Lam Research may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with Microsoft and Lam Research

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

The idea behind Microsoft and Lam Research Corp 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.