Correlation Between Microsoft and Paychex

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

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

Diversification Opportunities for Microsoft and Paychex

0.25

Correlation Coefficient

Microsoft  Paychex

Modest diversification

The 3 months correlation between Microsoft and Paychex is 0.25. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Paychex in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Paychex 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 Paychex. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Paychex has no effect on the direction of Microsoft i.e., Microsoft and Paychex go up and down completely randomly.

Pair Corralation between Microsoft and Paychex

Given the investment horizon of 90 days Microsoft is expected to under-perform the Paychex. In addition to that, Microsoft is 1.08 times more volatile than Paychex. It trades about -0.29 of its total potential returns per unit of risk. Paychex is currently generating about -0.08 per unit of volatility. If you would invest  12,162  in Paychex on February 1, 2024 and sell it today you would lose (281.00) from holding Paychex or give up 2.31% of portfolio value over 90 days.

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

Microsoft  vs.  Paychex

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.

Paychex

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Paychex has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Paychex is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Microsoft and Paychex

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

The idea behind Microsoft and Paychex 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.