Correlation Between AbbVie and Merck

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

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

Diversification Opportunities for AbbVie and Merck

0.06

Correlation Coefficient

AbbVie  Merck

Significant diversification

The 3 months correlation between AbbVie and Merck is 0.06. Overlapping area represents the amount of risk that can be diversified away by holding AbbVie Inc and Merck Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck and AbbVie 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 AbbVie Inc 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 has no effect on the direction of AbbVie i.e., AbbVie and Merck go up and down completely randomly.

Pair Corralation between AbbVie and Merck

Assuming the 90 days trading horizon AbbVie Inc is expected to generate 0.56 times more return on investment than Merck. However, AbbVie Inc is 1.78 times less risky than Merck. It trades about 0.2 of its potential returns per unit of risk. Merck Co is currently generating about 0.09 per unit of risk. If you would invest  6,422  in AbbVie Inc on September 25, 2024 and sell it today you would earn a total of  510.00  from holding AbbVie Inc or generate 7.94% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

AbbVie Inc  vs.  Merck Co

AbbVie Inc

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in AbbVie Inc are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat uncertain fundamental drivers, AbbVie may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Merck

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Merck Co has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong fundamental indicators, Merck is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with AbbVie and Merck

The main advantage of trading using opposite AbbVie and Merck positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if AbbVie 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 AbbVie Inc and Merck Co 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..