Correlation Between Merck KGaA and Real Brands

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

Diversification Opportunities for Merck KGaA and Real Brands

0.75

Correlation Coefficient

Merck KGaA  Real Brands

Poor diversification

The 3 months correlation between Merck and Real is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Merck KGaA ADR and Real Brands in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Real 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 Real Brands. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Real Brands has no effect on the direction of Merck KGaA i.e., Merck KGaA and Real Brands go up and down completely randomly.

Pair Corralation between Merck KGaA and Real Brands

Assuming the 90 days horizon Merck KGaA ADR is expected to under-perform the Real Brands. But the pink sheet apears to be less risky and, when comparing its historical volatility, Merck KGaA ADR is 27.03 times less risky than Real Brands. The pink sheet trades about -0.02 of its potential returns per unit of risk. The Real Brands is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  1.00  in Real Brands on September 3, 2024 and sell it today you would lose (0.99) from holding Real Brands or give up 99.0% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

Merck KGaA ADR  vs.  Real 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 uncertain 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.

Real Brands

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Real Brands has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental drivers, Real Brands is not utilizing all of its potentials. The recent stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Merck KGaA and Real Brands

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

The idea behind Merck KGaA ADR and Real 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.