Correlation Between NVIDIA and Microsoft

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

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

Diversification Opportunities for NVIDIA and Microsoft

0.12

Correlation Coefficient

NVIDIA  Microsoft

Average diversification

The 3 months correlation between NVIDIA and Microsoft is 0.12. Overlapping area represents the amount of risk that can be diversified away by holding NVIDIA and Microsoft in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microsoft and NVIDIA 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 NVIDIA are associated (or correlated) with Microsoft. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Microsoft has no effect on the direction of NVIDIA i.e., NVIDIA and Microsoft go up and down completely randomly.

Pair Corralation between NVIDIA and Microsoft

Given the investment horizon of 90 days NVIDIA is expected to under-perform the Microsoft. In addition to that, NVIDIA is 1.18 times more volatile than Microsoft. It trades about -0.02 of its total potential returns per unit of risk. Microsoft is currently generating about -0.02 per unit of volatility. If you would invest  41,878  in Microsoft on August 20, 2024 and sell it today you would lose (378.00) from holding Microsoft or give up 0.9% of portfolio value over 90 days.

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

NVIDIA  vs.  Microsoft

NVIDIA

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in NVIDIA are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak fundamental indicators, NVIDIA sustained solid returns over the last few months and may actually be approaching a breakup point.

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 recent stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with NVIDIA and Microsoft

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

The idea behind NVIDIA and Microsoft 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.

Check out your portfolio center.

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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.