Correlation Between Microsoft and Oil Equipment

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

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

Diversification Opportunities for Microsoft and Oil Equipment

0.52

Correlation Coefficient

Microsoft  Oil Equipment

Very weak diversification

The 3 months correlation between Microsoft and Oil is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Oil Equipment Services in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Oil Equipment Services 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 Oil Equipment. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Oil Equipment Services has no effect on the direction of Microsoft i.e., Microsoft and Oil Equipment go up and down completely randomly.

Pair Corralation between Microsoft and Oil Equipment

Given the investment horizon of 90 days Microsoft is expected to generate 7.85 times less return on investment than Oil Equipment. But when comparing it to its historical volatility, Microsoft is 1.58 times less risky than Oil Equipment. It trades about 0.02 of its potential returns per unit of risk. Oil Equipment Services is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  8,753  in Oil Equipment Services on February 4, 2024 and sell it today you would earn a total of  899.00  from holding Oil Equipment Services or generate 10.27% return on investment over 90 days.

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

Microsoft  vs.  Oil Equipment Services

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.

Oil Equipment Services

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Oil Equipment Services are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak basic indicators, Oil Equipment showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Microsoft and Oil Equipment

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

The idea behind Microsoft and Oil Equipment Services 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.