Correlation Between Disney and Microsoft

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

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

Diversification Opportunities for Disney and Microsoft

0.77

Correlation Coefficient

Disney  Microsoft

Poor diversification

The 3 months correlation between Disney and Microsoft is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Walt Disney and Microsoft in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microsoft and Disney 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 Walt Disney 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 Disney i.e., Disney and Microsoft go up and down completely randomly.

Pair Corralation between Disney and Microsoft

Considering the 90-day investment horizon Walt Disney is expected to generate 1.45 times more return on investment than Microsoft. However, Disney is 1.45 times more volatile than Microsoft. It trades about -0.12 of its potential returns per unit of risk. Microsoft is currently generating about -0.36 per unit of risk. If you would invest  11,670  in Walt Disney on January 21, 2024 and sell it today you would lose (409.00) from holding Walt Disney or give up 3.5% of portfolio value over 90 days.

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

Walt Disney  vs.  Microsoft

Walt Disney

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Walt Disney are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain forward indicators, Disney unveiled 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. 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.

Pair Trading with Disney and Microsoft

The main advantage of trading using opposite Disney and Microsoft positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Disney 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 Walt Disney 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 Portfolio Dashboard module to portfolio dashboard that provides centralized access to all your investments.