Correlation Between Merck KGaA and American Green

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

Diversification Opportunities for Merck KGaA and American Green

-0.49

Correlation Coefficient

Merck KGaA  American Green

Very good diversification

The 3 months correlation between Merck and American is -0.49. Overlapping area represents the amount of risk that can be diversified away by holding Merck KGaA ADR and American Green in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Green 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 American Green. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Green has no effect on the direction of Merck KGaA i.e., Merck KGaA and American Green go up and down completely randomly.

Pair Corralation between Merck KGaA and American Green

Assuming the 90 days horizon Merck KGaA is expected to generate 259.02 times less return on investment than American Green. But when comparing it to its historical volatility, Merck KGaA ADR is 19.86 times less risky than American Green. It trades about 0.01 of its potential returns per unit of risk. American Green is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  0.07  in American Green on September 4, 2024 and sell it today you would lose (0.02) from holding American Green or give up 28.57% of portfolio value over 90 days.

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

Merck KGaA ADR  vs.  American Green

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.

American Green

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in American Green are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat inconsistent fundamental drivers, American Green sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck KGaA and American Green

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

The idea behind Merck KGaA ADR and American Green 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.