Correlation Between Merck and Alibaba Group

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

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

Diversification Opportunities for Merck and Alibaba Group

0.54

Correlation Coefficient

Merck  Alibaba Group

Very weak diversification

The 3 months correlation between Merck and Alibaba is 0.54. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Alibaba Group Holding in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Alibaba Group Holding 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 Company are associated (or correlated) with Alibaba Group. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Alibaba Group Holding has no effect on the direction of Merck i.e., Merck and Alibaba Group go up and down completely randomly.

Pair Corralation between Merck and Alibaba Group

Assuming the 90 days trading horizon Merck Company is expected to under-perform the Alibaba Group. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 2.34 times less risky than Alibaba Group. The stock trades about -0.33 of its potential returns per unit of risk. The Alibaba Group Holding is currently generating about -0.04 of returns per unit of risk over similar time horizon. If you would invest  1,177,500  in Alibaba Group Holding on September 13, 2024 and sell it today you would lose (120,000) from holding Alibaba Group Holding or give up 10.19% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.41%
Values	Daily Returns

Merck Company  vs.  Alibaba Group Holding

Merck Company

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Merck Company has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's forward-looking signals remain somewhat 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.

Alibaba Group Holding

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Alibaba Group Holding has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Merck and Alibaba Group

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

The idea behind Merck Company and Alibaba Group Holding 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.