Correlation Between Merck KGaA and Gold River

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

Diversification Opportunities for Merck KGaA and Gold River

0.14

Correlation Coefficient

Merck KGaA  Gold River

Average diversification

The 3 months correlation between Merck and Gold is 0.14. Overlapping area represents the amount of risk that can be diversified away by holding Merck KGaA ADR and Gold River Prods in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Gold River Prods 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 Gold River. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Gold River Prods has no effect on the direction of Merck KGaA i.e., Merck KGaA and Gold River go up and down completely randomly.

Pair Corralation between Merck KGaA and Gold River

Assuming the 90 days horizon Merck KGaA is expected to generate 20.83 times less return on investment than Gold River. But when comparing it to its historical volatility, Merck KGaA ADR is 15.5 times less risky than Gold River. It trades about 0.05 of its potential returns per unit of risk. Gold River Prods is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  0.02  in Gold River Prods on December 19, 2024 and sell it today you would lose (0.01) from holding Gold River Prods or give up 50.0% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	93.65%
Values	Daily Returns

Merck KGaA ADR  vs.  Gold River Prods

Merck KGaA ADR

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Merck KGaA ADR are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. 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.

Gold River Prods

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Gold River Prods are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Gold River unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck KGaA and Gold River

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

The idea behind Merck KGaA ADR and Gold River Prods 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.