Correlation Between Microsoft and Alliance Data

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

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

Diversification Opportunities for Microsoft and Alliance Data

0.85

Correlation Coefficient

Microsoft  Alliance Data

Very poor diversification

The 3 months correlation between Microsoft and Alliance is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Alliance Data Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Alliance Data Systems 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 Alliance Data. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Alliance Data Systems has no effect on the direction of Microsoft i.e., Microsoft and Alliance Data go up and down completely randomly.

Pair Corralation between Microsoft and Alliance Data

Assuming the 90 days trading horizon Microsoft is expected to generate 0.49 times more return on investment than Alliance Data. However, Microsoft is 2.06 times less risky than Alliance Data. It trades about 0.26 of its potential returns per unit of risk. Alliance Data Systems is currently generating about 0.12 per unit of risk. If you would invest  38,320  in Microsoft on May 7, 2025 and sell it today you would earn a total of  8,090  from holding Microsoft or generate 21.11% return on investment over 90 days.

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

Microsoft  vs.  Alliance Data Systems

Microsoft

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile technical and fundamental indicators, Microsoft unveiled solid returns over the last few months and may actually be approaching a breakup point.

Alliance Data Systems

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Alliance Data Systems are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile fundamental indicators, Alliance Data unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Microsoft and Alliance Data

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

The idea behind Microsoft and Alliance Data Systems 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.