Correlation Between Merck KGaA and Chalice Brands

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

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

Diversification Opportunities for Merck KGaA and Chalice Brands

0.58

Correlation Coefficient

Merck KGaA  Chalice Brands

Very weak diversification

The 3 months correlation between Merck and Chalice is 0.58. Overlapping area represents the amount of risk that can be diversified away by holding Merck KGaA ADR and Chalice Brands in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Chalice Brands and Merck KGaA 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 Merck KGaA ADR are associated (or correlated) with Chalice Brands. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Chalice Brands has no effect on the direction of Merck KGaA i.e., Merck KGaA and Chalice Brands go up and down completely randomly.

Pair Corralation between Merck KGaA and Chalice Brands

Assuming the 90 days horizon Merck KGaA ADR is expected to generate 0.11 times more return on investment than Chalice Brands. However, Merck KGaA ADR is 9.41 times less risky than Chalice Brands. It trades about -0.18 of its potential returns per unit of risk. Chalice Brands is currently generating about -0.17 per unit of risk. If you would invest  3,407  in Merck KGaA ADR on October 4, 2024 and sell it today you would lose (544.00) from holding Merck KGaA ADR or give up 15.97% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.39%
Values	Daily Returns

Merck KGaA ADR  vs.  Chalice Brands

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 February 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Chalice Brands

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Chalice Brands has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's essential indicators remain nearly stable which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Merck KGaA and Chalice Brands

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

The idea behind Merck KGaA ADR and Chalice Brands 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 Transaction History module to view history of all your transactions and understand their impact on performance.