Correlation Between Associated British and Merck

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

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

Diversification Opportunities for Associated British and Merck

0.01

Correlation Coefficient

Associated British  Merck

Significant diversification

The 3 months correlation between Associated and Merck is 0.01. Overlapping area represents the amount of risk that can be diversified away by holding Associated British Foods and Merck Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck Company and Associated British 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 Associated British Foods 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 Associated British i.e., Associated British and Merck go up and down completely randomly.

Pair Corralation between Associated British and Merck

Assuming the 90 days trading horizon Associated British Foods is expected to generate 1.33 times more return on investment than Merck. However, Associated British is 1.33 times more volatile than Merck Company. It trades about 0.03 of its potential returns per unit of risk. Merck Company is currently generating about -0.22 per unit of risk. If you would invest  2,256  in Associated British Foods on December 3, 2024 and sell it today you would earn a total of  15.00  from holding Associated British Foods or generate 0.66% return on investment over 90 days.

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

Associated British Foods  vs.  Merck Company

Associated British Foods

Risk-Adjusted Performance

Very Weak

Over the last 90 days Associated British Foods has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Merck Company

Risk-Adjusted Performance

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 rather sound forward-looking signals, Merck is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Associated British and Merck

The main advantage of trading using opposite Associated British and Merck positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Associated British 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 Associated British Foods 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 Piotroski F Score module to get Piotroski F Score based on the binary analysis strategy of nine different fundamentals.