Correlation Between Merck KGaA and Captiva Verde

Can any of the company-specific risk be diversified away by investing in both Merck KGaA and Captiva Verde 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 Captiva Verde 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 Captiva Verde Land, you can compare the effects of market volatilities on Merck KGaA and Captiva Verde 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 Captiva Verde. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck KGaA and Captiva Verde.

Diversification Opportunities for Merck KGaA and Captiva Verde

-0.2

Correlation Coefficient

Merck KGaA  Captiva Verde

Good diversification

The 3 months correlation between Merck and Captiva is -0.2. Overlapping area represents the amount of risk that can be diversified away by holding Merck KGaA ADR and Captiva Verde Land in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Captiva Verde Land 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 Captiva Verde. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Captiva Verde Land has no effect on the direction of Merck KGaA i.e., Merck KGaA and Captiva Verde go up and down completely randomly.

Pair Corralation between Merck KGaA and Captiva Verde

Assuming the 90 days horizon Merck KGaA ADR is expected to under-perform the Captiva Verde. But the pink sheet apears to be less risky and, when comparing its historical volatility, Merck KGaA ADR is 26.47 times less risky than Captiva Verde. The pink sheet trades about -0.03 of its potential returns per unit of risk. The Captiva Verde Land is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  1.00  in Captiva Verde Land on December 5, 2024 and sell it today you would earn a total of  3.00  from holding Captiva Verde Land or generate 300.0% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	99.19%
Values	Daily Returns

Merck KGaA ADR  vs.  Captiva Verde Land

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.

Captiva Verde Land

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Captiva Verde Land are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. Despite nearly conflicting basic indicators, Captiva Verde reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck KGaA and Captiva Verde

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

The idea behind Merck KGaA ADR and Captiva Verde Land 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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.