Correlation Between Merit Medical and Iron Road

Can any of the company-specific risk be diversified away by investing in both Merit Medical and Iron Road 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 Merit Medical and Iron Road into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Merit Medical Systems and Iron Road Limited, you can compare the effects of market volatilities on Merit Medical and Iron Road 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 Merit Medical with a short position of Iron Road. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merit Medical and Iron Road.

Diversification Opportunities for Merit Medical and Iron Road

-0.34

Correlation Coefficient

Merit Medical  Iron Road

Very good diversification

The 3 months correlation between Merit and Iron is -0.34. Overlapping area represents the amount of risk that can be diversified away by holding Merit Medical Systems and Iron Road Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Iron Road Limited and Merit Medical 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 Merit Medical Systems are associated (or correlated) with Iron Road. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Iron Road Limited has no effect on the direction of Merit Medical i.e., Merit Medical and Iron Road go up and down completely randomly.

Pair Corralation between Merit Medical and Iron Road

Assuming the 90 days trading horizon Merit Medical Systems is expected to under-perform the Iron Road. But the stock apears to be less risky and, when comparing its historical volatility, Merit Medical Systems is 2.26 times less risky than Iron Road. The stock trades about -0.33 of its potential returns per unit of risk. The Iron Road Limited is currently generating about -0.08 of returns per unit of risk over similar time horizon. If you would invest  2.35  in Iron Road Limited on October 11, 2024 and sell it today you would lose (0.10) from holding Iron Road Limited or give up 4.26% of portfolio value over 90 days.

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

Merit Medical Systems  vs.  Iron Road Limited

Merit Medical Systems

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Merit Medical Systems are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Merit Medical may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Iron Road Limited

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Iron Road Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Iron Road is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Merit Medical and Iron Road

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

The idea behind Merit Medical Systems and Iron Road Limited 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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.