Correlation Between 4Front Ventures and Merck KGaA

Can any of the company-specific risk be diversified away by investing in both 4Front Ventures and Merck KGaA 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 4Front Ventures and Merck KGaA into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between 4Front Ventures Corp and Merck KGaA ADR, you can compare the effects of market volatilities on 4Front Ventures and Merck KGaA 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 4Front Ventures with a short position of Merck KGaA. Check out your portfolio center. Please also check ongoing floating volatility patterns of 4Front Ventures and Merck KGaA.

Diversification Opportunities for 4Front Ventures and Merck KGaA

-0.41

Correlation Coefficient

4Front Ventures  Merck KGaA

Very good diversification

The 3 months correlation between 4Front and Merck is -0.41. Overlapping area represents the amount of risk that can be diversified away by holding 4Front Ventures Corp and Merck KGaA ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck KGaA ADR and 4Front Ventures 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 4Front Ventures Corp are associated (or correlated) with Merck KGaA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Merck KGaA ADR has no effect on the direction of 4Front Ventures i.e., 4Front Ventures and Merck KGaA go up and down completely randomly.

Pair Corralation between 4Front Ventures and Merck KGaA

Assuming the 90 days horizon 4Front Ventures Corp is expected to generate 10.48 times more return on investment than Merck KGaA. However, 4Front Ventures is 10.48 times more volatile than Merck KGaA ADR. It trades about 0.14 of its potential returns per unit of risk. Merck KGaA ADR is currently generating about -0.02 per unit of risk. If you would invest  1.00  in 4Front Ventures Corp on December 28, 2024 and sell it today you would earn a total of  0.75  from holding 4Front Ventures Corp or generate 75.0% return on investment over 90 days.

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

4Front Ventures Corp  vs.  Merck KGaA ADR

4Front Ventures Corp

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in 4Front Ventures Corp are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak basic indicators, 4Front Ventures reported solid returns over the last few months and may actually be approaching a breakup point.

Merck KGaA ADR

Risk-Adjusted Performance

Very Weak

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

Pair Trading with 4Front Ventures and Merck KGaA

The main advantage of trading using opposite 4Front Ventures and Merck KGaA positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if 4Front Ventures position performs unexpectedly, Merck KGaA 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 KGaA will offset losses from the drop in Merck KGaA's long position.

The idea behind 4Front Ventures Corp and Merck KGaA ADR 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.