Correlation Between Microsoft and Palantir Technologies

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

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

Diversification Opportunities for Microsoft and Palantir Technologies

-0.15

Correlation Coefficient

Microsoft  Palantir Technologies

Good diversification

The 3 months correlation between Microsoft and Palantir is -0.15. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Palantir Technologies in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Palantir Technologies 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 Palantir Technologies. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Palantir Technologies has no effect on the direction of Microsoft i.e., Microsoft and Palantir Technologies go up and down completely randomly.

Pair Corralation between Microsoft and Palantir Technologies

Given the investment horizon of 90 days Microsoft is expected to under-perform the Palantir Technologies. But the stock apears to be less risky and, when comparing its historical volatility, Microsoft is 2.63 times less risky than Palantir Technologies. The stock trades about -0.07 of its potential returns per unit of risk. The Palantir Technologies is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  2,583  in Palantir Technologies on July 2, 2024 and sell it today you would earn a total of  1,137  from holding Palantir Technologies or generate 44.02% return on investment over 90 days.

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

Microsoft  vs.  Palantir Technologies

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.

Palantir Technologies

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Palantir Technologies are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Even with relatively abnormal basic indicators, Palantir Technologies reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Microsoft and Palantir Technologies

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

The idea behind Microsoft and Palantir Technologies 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.