Correlation Between Link Reservations and Merck KGaA

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

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

Diversification Opportunities for Link Reservations and Merck KGaA

0.74

Correlation Coefficient

Link Reservations  Merck KGaA

Poor diversification

The 3 months correlation between Link and Merck is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Link Reservations 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 Link Reservations 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 Link Reservations 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 Link Reservations i.e., Link Reservations and Merck KGaA go up and down completely randomly.

Pair Corralation between Link Reservations and Merck KGaA

Given the investment horizon of 90 days Link Reservations is expected to generate 12.32 times more return on investment than Merck KGaA. However, Link Reservations is 12.32 times more volatile than Merck KGaA ADR. It trades about 0.04 of its potential returns per unit of risk. Merck KGaA ADR is currently generating about -0.22 per unit of risk. If you would invest  0.20  in Link Reservations on September 4, 2024 and sell it today you would lose (0.10) from holding Link Reservations or give up 50.0% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.44%
Values	Daily Returns

Link Reservations  vs.  Merck KGaA ADR

Link Reservations

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Link Reservations are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Link Reservations showed solid returns over the last few months and may actually be approaching a breakup point.

Merck KGaA ADR

Risk-Adjusted Performance

0 of 100

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 weak performance in the last few months, the Stock's technical and fundamental 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.

Pair Trading with Link Reservations and Merck KGaA

The main advantage of trading using opposite Link Reservations and Merck KGaA positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Link Reservations 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 Link Reservations 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.