Correlation Between Microsoft and Alphabet

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Can any of the company-specific risk be diversified away by investing in both Microsoft and Alphabet 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 Alphabet into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Microsoft and Alphabet Class C, you can compare the effects of market volatilities on Microsoft and Alphabet 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 Alphabet. Check out your portfolio center. Please also check ongoing floating volatility patterns of Microsoft and Alphabet.

Diversification Opportunities for Microsoft and Alphabet

0.68
  Correlation Coefficient

Poor diversification

The 3 months correlation between Microsoft and Alphabet is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Alphabet Class C in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Alphabet Class C 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 Alphabet. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Alphabet Class C has no effect on the direction of Microsoft i.e., Microsoft and Alphabet go up and down completely randomly.

Pair Corralation between Microsoft and Alphabet

Given the investment horizon of 90 days Microsoft is expected to generate 0.71 times more return on investment than Alphabet. However, Microsoft is 1.41 times less risky than Alphabet. It trades about 0.12 of its potential returns per unit of risk. Alphabet Class C is currently generating about -0.15 per unit of risk. If you would invest  40,490  in Microsoft on December 5, 2023 and sell it today you would earn a total of  1,060  from holding Microsoft or generate 2.62% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Microsoft  vs.  Alphabet Class C

 Performance 
       Timeline  
Microsoft 

Risk-Adjusted Performance

14 of 100

 
Low
 
High
Good
Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak technical and fundamental indicators, Microsoft may actually be approaching a critical reversion point that can send shares even higher in April 2024.
Alphabet Class C 

Risk-Adjusted Performance

3 of 100

 
Low
 
High
Insignificant
Compared to the overall equity markets, risk-adjusted returns on investments in Alphabet Class C are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Alphabet is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Microsoft and Alphabet Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Microsoft and Alphabet

The main advantage of trading using opposite Microsoft and Alphabet positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, Alphabet 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 Alphabet will offset losses from the drop in Alphabet's long position.
The idea behind Microsoft and Alphabet Class C 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 Stock Screener module to find equities using a custom stock filter or screen asymmetry in trading patterns, price, volume, or investment outlook..

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