Correlation Between Merck and Johnson Johnson

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

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

Diversification Opportunities for Merck and Johnson Johnson

-0.03

Correlation Coefficient

Merck  Johnson Johnson

Good diversification

The 3 months correlation between Merck and Johnson is -0.03. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Johnson Johnson Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Johnson Johnson 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 Johnson Johnson. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Johnson Johnson has no effect on the direction of Merck i.e., Merck and Johnson Johnson go up and down completely randomly.

Pair Corralation between Merck and Johnson Johnson

Assuming the 90 days trading horizon Merck is expected to generate 12.59 times less return on investment than Johnson Johnson. In addition to that, Merck is 1.44 times more volatile than Johnson Johnson Co. It trades about 0.02 of its total potential returns per unit of risk. Johnson Johnson Co is currently generating about 0.28 per unit of volatility. If you would invest  1,132,500  in Johnson Johnson Co on December 30, 2024 and sell it today you would earn a total of  297,500  from holding Johnson Johnson Co or generate 26.27% return on investment over 90 days.

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

Merck Company  vs.  Johnson Johnson Co

Merck Company

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong forward-looking signals, Merck is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Johnson Johnson

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Johnson Johnson Co are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak forward-looking indicators, Johnson Johnson sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck and Johnson Johnson

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

The idea behind Merck Company and Johnson Johnson Co 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 Crypto Correlations module to use cryptocurrency correlation module to diversify your cryptocurrency portfolio across multiple coins.