Correlation Between Caterpillar and Merck

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

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

Diversification Opportunities for Caterpillar and Merck

0.36

Correlation Coefficient

Caterpillar  Merck

Weak diversification

The 3 months correlation between Caterpillar and Merck is 0.36. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Merck Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck Company and Caterpillar 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 Caterpillar 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 Caterpillar i.e., Caterpillar and Merck go up and down completely randomly.

Pair Corralation between Caterpillar and Merck

Considering the 90-day investment horizon Caterpillar is expected to under-perform the Merck. But the stock apears to be less risky and, when comparing its historical volatility, Caterpillar is 1.06 times less risky than Merck. The stock trades about -0.08 of its potential returns per unit of risk. The Merck Company is currently generating about -0.07 of returns per unit of risk over similar time horizon. If you would invest  9,753  in Merck Company on December 29, 2024 and sell it today you would lose (830.00) from holding Merck Company or give up 8.51% of portfolio value over 90 days.

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

Caterpillar  vs.  Merck Company

Caterpillar

Risk-Adjusted Performance

Very Weak

Over the last 90 days Caterpillar has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unfluctuating performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

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. Despite latest uncertain performance, the Stock's basic indicators remain persistent and the latest mess on Wall Street may also be a sign of long-standing gains for the company institutional investors.

Pair Trading with Caterpillar and Merck

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