Correlation Between General American and Microsoft

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

Diversification Opportunities for General American and Microsoft

0.5
  Correlation Coefficient

Very weak diversification

The 3 months correlation between General and Microsoft is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding General American Investors and Microsoft in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microsoft and General American 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 General American Investors 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 General American i.e., General American and Microsoft go up and down completely randomly.

Pair Corralation between General American and Microsoft

Assuming the 90 days horizon General American is expected to generate 3.9 times less return on investment than Microsoft. But when comparing it to its historical volatility, General American Investors is 2.17 times less risky than Microsoft. It trades about 0.12 of its potential returns per unit of risk. Microsoft is currently generating about 0.21 of returns per unit of risk over similar time horizon. If you would invest  22,753  in Microsoft on September 2, 2022 and sell it today you would earn a total of  2,761  from holding Microsoft or generate 12.13% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthWeak
Accuracy100.0%
ValuesDaily Returns

General American Investors  vs.  Microsoft

 Performance (%) 
       Timeline  
General American Inv 
General Performance
2 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in General American Investors are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong primary indicators, General American is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

General Price Channel

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 latest stock price uproar, may contribute to short-horizon losses for the private investors.

Microsoft Price Channel

General American and Microsoft Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with General American and Microsoft

The main advantage of trading using opposite General American and Microsoft positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if General American 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.
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The idea behind General American Investors 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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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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.

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