Correlation Between Merck and Alphabet

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

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

Diversification Opportunities for Merck and Alphabet

0.21

Correlation Coefficient

Merck  Alphabet

Modest diversification

The 3 months correlation between Merck and Alphabet is 0.21. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Alphabet Inc Class A CEDEAR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Alphabet Class A 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 Alphabet. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Alphabet Class A has no effect on the direction of Merck i.e., Merck and Alphabet go up and down completely randomly.

Pair Corralation between Merck and Alphabet

Assuming the 90 days trading horizon Merck Company is expected to under-perform the Alphabet. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 1.35 times less risky than Alphabet. The stock trades about -0.29 of its potential returns per unit of risk. The Alphabet Inc Class A CEDEAR is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  337,000  in Alphabet Inc Class A CEDEAR on September 13, 2024 and sell it today you would earn a total of  21,000  from holding Alphabet Inc Class A CEDEAR or generate 6.23% return on investment over 90 days.

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

Merck Company  vs.  Alphabet Inc Class A CEDEAR

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.

Alphabet Class A

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Alphabet Inc Class A CEDEAR are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong fundamental drivers, Alphabet 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 Alphabet

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

The idea behind Merck Company and Alphabet Inc Class A CEDEAR 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.