Correlation Between Merck KGaA and Pharmadrug

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

Diversification Opportunities for Merck KGaA and Pharmadrug

0.15

Correlation Coefficient

Merck KGaA  Pharmadrug

Average diversification

The 3 months correlation between Merck and Pharmadrug is 0.15. Overlapping area represents the amount of risk that can be diversified away by holding Merck KGaA ADR and Pharmadrug in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Pharmadrug 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 Pharmadrug. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Pharmadrug has no effect on the direction of Merck KGaA i.e., Merck KGaA and Pharmadrug go up and down completely randomly.

Pair Corralation between Merck KGaA and Pharmadrug

Assuming the 90 days horizon Merck KGaA ADR is expected to under-perform the Pharmadrug. But the pink sheet apears to be less risky and, when comparing its historical volatility, Merck KGaA ADR is 10.07 times less risky than Pharmadrug. The pink sheet trades about 0.0 of its potential returns per unit of risk. The Pharmadrug is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  0.95  in Pharmadrug on December 30, 2024 and sell it today you would lose (0.13) from holding Pharmadrug or give up 13.68% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	96.77%
Values	Daily Returns

Merck KGaA ADR  vs.  Pharmadrug

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.

Pharmadrug

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Pharmadrug are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile essential indicators, Pharmadrug reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck KGaA and Pharmadrug

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

The idea behind Merck KGaA ADR and Pharmadrug 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.

Check out your portfolio center.

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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.