Correlation Between Merck and Verizon Communications

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

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

Diversification Opportunities for Merck and Verizon Communications

0.47

Correlation Coefficient

Merck  Verizon Communications

Very weak diversification

The 3 months correlation between Merck and Verizon is 0.47. Overlapping area represents the amount of risk that can be diversified away by holding Merck Co and Verizon Communications in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Verizon Communications 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 Verizon Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Verizon Communications has no effect on the direction of Merck i.e., Merck and Verizon Communications go up and down completely randomly.

Pair Corralation between Merck and Verizon Communications

Assuming the 90 days trading horizon Merck Co is expected to under-perform the Verizon Communications. In addition to that, Merck is 1.58 times more volatile than Verizon Communications. It trades about -0.02 of its total potential returns per unit of risk. Verizon Communications is currently generating about -0.02 per unit of volatility. If you would invest  3,912  in Verizon Communications on October 25, 2024 and sell it today you would lose (91.00) from holding Verizon Communications or give up 2.33% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.31%
Values	Daily Returns

Merck Co  vs.  Verizon Communications

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.

Verizon Communications

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Verizon Communications has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Verizon Communications 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 Verizon Communications

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

The idea behind Merck Co and Verizon Communications 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.