Correlation Between Food Life and Merck

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

By analyzing existing cross correlation between Food Life Companies and Merck Company, you can compare the effects of market volatilities on Food Life and Merck 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 Food Life with a short position of Merck. Check out your portfolio center. Please also check ongoing floating volatility patterns of Food Life and Merck.

Diversification Opportunities for Food Life and Merck

-0.83

Correlation Coefficient

Food Life  Merck

Pay attention - limited upside

The 3 months correlation between Food and Merck is -0.83. Overlapping area represents the amount of risk that can be diversified away by holding Food Life Companies and Merck Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck Company and Food Life 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 Food Life Companies are associated (or correlated) with Merck. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Merck Company has no effect on the direction of Food Life i.e., Food Life and Merck go up and down completely randomly.

Pair Corralation between Food Life and Merck

Assuming the 90 days horizon Food Life Companies is expected to generate 1.12 times more return on investment than Merck. However, Food Life is 1.12 times more volatile than Merck Company. It trades about 0.27 of its potential returns per unit of risk. Merck Company is currently generating about -0.18 per unit of risk. If you would invest  1,600  in Food Life Companies on September 12, 2024 and sell it today you would earn a total of  540.00  from holding Food Life Companies or generate 33.75% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Significant
Accuracy	98.46%
Values	Daily Returns

Food Life Companies  vs.  Merck Company

Food Life Companies

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Food Life Companies are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Food Life reported solid returns over the last few months and may actually be approaching a breakup point.

Merck Company

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Merck Company has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fragile performance in the last few months, the Stock's forward-looking signals remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with Food Life and Merck

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

The idea behind Food Life Companies and Merck Company 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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.