Correlation Between Microsoft and Cisco Systems

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

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

Diversification Opportunities for Microsoft and Cisco Systems

0.94

Correlation Coefficient

Microsoft  Cisco Systems

Almost no diversification

The 3 months correlation between Microsoft and Cisco is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Cisco Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cisco Systems 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 Cisco Systems. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cisco Systems has no effect on the direction of Microsoft i.e., Microsoft and Cisco Systems go up and down completely randomly.

Pair Corralation between Microsoft and Cisco Systems

Assuming the 90 days trading horizon Microsoft is expected to generate 0.71 times more return on investment than Cisco Systems. However, Microsoft is 1.41 times less risky than Cisco Systems. It trades about 0.4 of its potential returns per unit of risk. Cisco Systems is currently generating about 0.19 per unit of risk. If you would invest  8,719  in Microsoft on April 21, 2025 and sell it today you would earn a total of  3,136  from holding Microsoft or generate 35.97% return on investment over 90 days.

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

Microsoft  vs.  Cisco Systems

Microsoft

Risk-Adjusted Performance

Very Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 31 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak technical and fundamental indicators, Microsoft sustained solid returns over the last few months and may actually be approaching a breakup point.

Cisco Systems

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Cisco Systems are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak fundamental indicators, Cisco Systems sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Microsoft and Cisco Systems

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

The idea behind Microsoft and Cisco Systems 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 Piotroski F Score module to get Piotroski F Score based on the binary analysis strategy of nine different fundamentals.