Correlation Between Microsoft and Imperial Oil

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

Diversification Opportunities for Microsoft and Imperial Oil

0.39
  Correlation Coefficient

Weak diversification

The 3 months correlation between Microsoft and Imperial is 0.39. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Imperial Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Imperial Oil 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 Imperial Oil. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Imperial Oil has no effect on the direction of Microsoft i.e., Microsoft and Imperial Oil go up and down completely randomly.

Pair Corralation between Microsoft and Imperial Oil

Given the investment horizon of 90 days Microsoft is expected to under-perform the Imperial Oil. But the stock apears to be less risky and, when comparing its historical volatility, Microsoft is 1.12 times less risky than Imperial Oil. The stock trades about -0.22 of its potential returns per unit of risk. The Imperial Oil is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  6,984  in Imperial Oil on February 1, 2024 and sell it today you would lose (89.00) from holding Imperial Oil or give up 1.27% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Weak
Accuracy100.0%
ValuesDaily Returns

Microsoft  vs.  Imperial Oil

 Performance 
       Timeline  
Microsoft 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days Microsoft has generated negative risk-adjusted returns adding no value to investors with long positions. 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.
Imperial Oil 

Risk-Adjusted Performance

16 of 100

 
Weak
 
Strong
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Imperial Oil are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of very uncertain primary indicators, Imperial Oil displayed solid returns over the last few months and may actually be approaching a breakup point.

Microsoft and Imperial Oil Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Microsoft and Imperial Oil

The main advantage of trading using opposite Microsoft and Imperial Oil positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, Imperial Oil 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 Imperial Oil will offset losses from the drop in Imperial Oil's long position.
The idea behind Microsoft and Imperial Oil 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.

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