Correlation Between KB Home and Merck

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

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

Diversification Opportunities for KB Home and Merck

-0.16

Correlation Coefficient

KB Home  Merck

Good diversification

The 3 months correlation between KBH and Merck is -0.16. Overlapping area represents the amount of risk that can be diversified away by holding KB Home and Merck Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck Company and KB Home 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 KB Home 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 KB Home i.e., KB Home and Merck go up and down completely randomly.

Pair Corralation between KB Home and Merck

Assuming the 90 days trading horizon KB Home is expected to generate 1.53 times more return on investment than Merck. However, KB Home is 1.53 times more volatile than Merck Company. It trades about 0.09 of its potential returns per unit of risk. Merck Company is currently generating about 0.0 per unit of risk. If you would invest  53,690  in KB Home on September 24, 2024 and sell it today you would earn a total of  80,010  from holding KB Home or generate 149.02% return on investment over 90 days.

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

KB Home  vs.  Merck Company

KB Home

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days KB Home has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's technical indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Merck Company

Risk-Adjusted Performance

0 of 100

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 latest weak performance, the Stock's forward-looking signals remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with KB Home and Merck

The main advantage of trading using opposite KB Home and Merck positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if KB Home 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 KB Home 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 Global Markets Map module to get a quick overview of global market snapshot using zoomable world map. Drill down to check world indexes.