Correlation Between Microsoft and Exxon

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

Diversification Opportunities for Microsoft and Exxon

-0.13
  Correlation Coefficient

Good diversification

The 3 months correlation between Microsoft and Exxon is -0.13. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Exxon Mobil Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Exxon Mobil Corp 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 Exxon. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Exxon Mobil Corp has no effect on the direction of Microsoft i.e., Microsoft and Exxon go up and down completely randomly.

Pair Corralation between Microsoft and Exxon

Given the investment horizon of 90 days Microsoft is expected to generate 5.1 times less return on investment than Exxon. But when comparing it to its historical volatility, Microsoft is 1.12 times less risky than Exxon. It trades about 0.02 of its potential returns per unit of risk. Exxon Mobil Corp is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  3,939  in Exxon Mobil Corp on September 8, 2022 and sell it today you would earn a total of  6,449  from holding Exxon Mobil Corp or generate 163.72% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthInsignificant
Accuracy100.0%
ValuesDaily Returns

Microsoft  vs.  Exxon Mobil Corp

 Performance (%) 
       Timeline  
Microsoft 
Microsoft Performance
0 of 100
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 current stock price uproar, may contribute to short-horizon losses for the private investors.

Microsoft Price Channel

Exxon Mobil Corp 
Exxon Performance
6 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Exxon Mobil Corp are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady basic indicators, Exxon may actually be approaching a critical reversion point that can send shares even higher in January 2023.

Exxon Price Channel

Microsoft and Exxon Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Microsoft and Exxon

The main advantage of trading using opposite Microsoft and Exxon positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft position performs unexpectedly, Exxon 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 Exxon will offset losses from the drop in Exxon's long position.
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The idea behind Microsoft and Exxon Mobil Corp 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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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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.

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