Correlation Between Merck and AbbVie

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

By analyzing existing cross correlation between Merck Co and AbbVie Inc, you can compare the effects of market volatilities on Merck and AbbVie 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 with a short position of AbbVie. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and AbbVie.

Diversification Opportunities for Merck and AbbVie

0.19

Correlation Coefficient

Merck  AbbVie

Average diversification

The 3 months correlation between Merck and AbbVie is 0.19. Overlapping area represents the amount of risk that can be diversified away by holding Merck Co and AbbVie Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AbbVie Inc and Merck 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 Co are associated (or correlated) with AbbVie. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AbbVie Inc has no effect on the direction of Merck i.e., Merck and AbbVie go up and down completely randomly.

Pair Corralation between Merck and AbbVie

Assuming the 90 days trading horizon Merck Co is expected to under-perform the AbbVie. In addition to that, Merck is 1.44 times more volatile than AbbVie Inc. It trades about -0.16 of its total potential returns per unit of risk. AbbVie Inc is currently generating about 0.11 per unit of volatility. If you would invest  6,475  in AbbVie Inc on October 13, 2024 and sell it today you would earn a total of  221.00  from holding AbbVie Inc or generate 3.41% return on investment over 90 days.

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

Merck Co  vs.  AbbVie Inc

Merck

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Merck Co has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong fundamental indicators, Merck is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

AbbVie Inc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days AbbVie Inc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong fundamental drivers, AbbVie is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Merck and AbbVie

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

The idea behind Merck Co and AbbVie Inc 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.