Correlation Between Teva Pharma and Microsoft

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

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

Diversification Opportunities for Teva Pharma and Microsoft

0.64

Correlation Coefficient

Teva Pharma  Microsoft

Poor diversification

The 3 months correlation between Teva and Microsoft is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Teva Pharma Industries and Microsoft in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microsoft and Teva Pharma 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 Teva Pharma Industries 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 Teva Pharma i.e., Teva Pharma and Microsoft go up and down completely randomly.

Pair Corralation between Teva Pharma and Microsoft

Given the investment horizon of 90 days Teva Pharma Industries is expected to generate 1.62 times more return on investment than Microsoft. However, Teva Pharma is 1.62 times more volatile than Microsoft. It trades about 0.06 of its potential returns per unit of risk. Microsoft is currently generating about 0.06 per unit of risk. If you would invest  742.00  in Teva Pharma Industries on January 27, 2024 and sell it today you would earn a total of  583.00  from holding Teva Pharma Industries or generate 78.57% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	97.82%
Values	Daily Returns

Teva Pharma Industries  vs.  Microsoft

Teva Pharma Industries

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Teva Pharma Industries are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat inconsistent basic indicators, Teva Pharma may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Microsoft

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Microsoft has generated negative risk-adjusted returns adding no value to investors with long positions. 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 Teva Pharma and Microsoft

The main advantage of trading using opposite Teva Pharma and Microsoft positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Teva Pharma 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 Teva Pharma Industries 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.