Correlation Between Carvana Co and Microsoft Corp

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

Diversification Opportunities for Carvana Co and Microsoft Corp

0.67
  Correlation Coefficient

Poor diversification

The 3 months correlation between Carvana and Microsoft is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Carvana Co Cl and Microsoft Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microsoft Corp and Carvana Co 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 Carvana Co Cl are associated (or correlated) with Microsoft Corp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Microsoft Corp has no effect on the direction of Carvana Co i.e., Carvana Co and Microsoft Corp go up and down completely randomly.

Pair Corralation between Carvana Co and Microsoft Corp

Given the investment horizon of 90 days Carvana Co Cl is expected to generate 5.34 times more return on investment than Microsoft Corp. However, Carvana Co is 5.34 times more volatile than Microsoft Corp. It trades about 0.22 of its potential returns per unit of risk. Microsoft Corp is currently generating about 0.19 per unit of risk. If you would invest  2,443  in Carvana Co Cl on May 16, 2022 and sell it today you would earn a total of  2,767  from holding Carvana Co Cl or generate 113.26% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy97.67%
ValuesDaily Returns

Carvana Co Cl  vs.  Microsoft Corp

 Performance (%) 
       Timeline  
Carvana Co Cl 
Carvana Performance
7 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Carvana Co Cl are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite somewhat unsteady basic indicators, Carvana Co sustained solid returns over the last few months and may actually be approaching a breakup point.

Carvana Price Channel

Microsoft Corp 
Microsoft Performance
7 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft Corp are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak technical and fundamental indicators, Microsoft Corp may actually be approaching a critical reversion point that can send shares even higher in September 2022.

Microsoft Price Channel

Carvana Co and Microsoft Corp Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Carvana Co and Microsoft Corp

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

Microsoft Corp

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The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against Microsoft Corp as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. Microsoft Corp's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, Microsoft Corp's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to Microsoft Corp.
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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.

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