Correlation Between Microsoft and Dollar Tree

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

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

Diversification Opportunities for Microsoft and Dollar Tree

0.89

Correlation Coefficient

Microsoft  Dollar Tree

Very poor diversification

The 3 months correlation between Microsoft and Dollar is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Dollar Tree in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dollar Tree 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 Dollar Tree. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dollar Tree has no effect on the direction of Microsoft i.e., Microsoft and Dollar Tree go up and down completely randomly.

Pair Corralation between Microsoft and Dollar Tree

Assuming the 90 days trading horizon Microsoft is expected to generate 1.94 times less return on investment than Dollar Tree. But when comparing it to its historical volatility, Microsoft is 1.57 times less risky than Dollar Tree. It trades about 0.15 of its potential returns per unit of risk. Dollar Tree is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  6,731  in Dollar Tree on March 25, 2025 and sell it today you would earn a total of  2,968  from holding Dollar Tree or generate 44.09% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.39%
Values	Daily Returns

Microsoft  vs.  Dollar Tree

Microsoft

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Microsoft unveiled solid returns over the last few months and may actually be approaching a breakup point.

Dollar Tree

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Dollar Tree are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Dollar Tree unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Microsoft and Dollar Tree

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

The idea behind Microsoft and Dollar Tree 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 Transaction History module to view history of all your transactions and understand their impact on performance.