Correlation Between British American and Merck

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

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

Diversification Opportunities for British American and Merck

0.27

Correlation Coefficient

British American  Merck

Modest diversification

The 3 months correlation between British and Merck is 0.27. Overlapping area represents the amount of risk that can be diversified away by holding British American Tobacco and Merck Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck and British 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 British American Tobacco 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 British American i.e., British American and Merck go up and down completely randomly.

Pair Corralation between British American and Merck

Assuming the 90 days trading horizon British American is expected to generate 46.6 times less return on investment than Merck. But when comparing it to its historical volatility, British American Tobacco is 2.41 times less risky than Merck. It trades about 0.0 of its potential returns per unit of risk. Merck Co is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  7,575  in Merck Co on October 1, 2024 and sell it today you would earn a total of  119.00  from holding Merck Co or generate 1.57% return on investment over 90 days.

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

British American Tobacco  vs.  Merck Co

British American Tobacco

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in British American Tobacco are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, British American sustained solid returns over the last few months and may actually be approaching a breakup point.

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 British American and Merck

The main advantage of trading using opposite British American and Merck positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if British American 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 British American Tobacco 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 Sign In To Macroaxis module to sign in to explore Macroaxis' wealth optimization platform and fintech modules.