Correlation Between Alphabet and Microsoft

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

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

Diversification Opportunities for Alphabet and Microsoft

0.48

Correlation Coefficient

Alphabet  Microsoft

Very weak diversification

The 3 months correlation between Alphabet and Microsoft is 0.48. Overlapping area represents the amount of risk that can be diversified away by holding Alphabet Class A and Microsoft in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microsoft and Alphabet 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 Alphabet Class A 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 Alphabet i.e., Alphabet and Microsoft go up and down completely randomly.

Pair Corralation between Alphabet and Microsoft

Assuming the 90 days trading horizon Alphabet Class A is expected to generate 2.1 times more return on investment than Microsoft. However, Alphabet is 2.1 times more volatile than Microsoft. It trades about 0.23 of its potential returns per unit of risk. Microsoft is currently generating about -0.12 per unit of risk. If you would invest  14,294  in Alphabet Class A on January 30, 2024 and sell it today you would earn a total of  1,774  from holding Alphabet Class A or generate 12.41% return on investment over 90 days.

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

Alphabet Class A  vs.  Microsoft

Alphabet Class A

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Alphabet Class A are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak technical and fundamental indicators, Alphabet reported solid returns over the last few months and may actually be approaching a breakup point.

Microsoft

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Microsoft is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Alphabet and Microsoft

The main advantage of trading using opposite Alphabet and Microsoft positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Alphabet 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 Alphabet Class A 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.

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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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.