Correlation Between Microsoft and Ecopetrol

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

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

Diversification Opportunities for Microsoft and Ecopetrol

-0.1

Correlation Coefficient

Microsoft  Ecopetrol

Good diversification

The 3 months correlation between Microsoft and Ecopetrol is -0.1. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Ecopetrol SA ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ecopetrol SA ADR 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 Ecopetrol. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ecopetrol SA ADR has no effect on the direction of Microsoft i.e., Microsoft and Ecopetrol go up and down completely randomly.

Pair Corralation between Microsoft and Ecopetrol

Given the investment horizon of 90 days Microsoft is expected to generate 0.71 times more return on investment than Ecopetrol. However, Microsoft is 1.4 times less risky than Ecopetrol. It trades about 0.06 of its potential returns per unit of risk. Ecopetrol SA ADR is currently generating about -0.02 per unit of risk. If you would invest  41,062  in Microsoft on February 11, 2025 and sell it today you would earn a total of  2,811  from holding Microsoft or generate 6.85% return on investment over 90 days.

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

Microsoft  vs.  Ecopetrol SA ADR

Microsoft

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively abnormal technical and fundamental indicators, Microsoft may actually be approaching a critical reversion point that can send shares even higher in June 2025.

Ecopetrol SA ADR

Risk-Adjusted Performance

Very Weak

Over the last 90 days Ecopetrol SA ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, Ecopetrol is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Microsoft and Ecopetrol

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

The idea behind Microsoft and Ecopetrol SA ADR 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.