Correlation Between Merck and Compania

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

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

Diversification Opportunities for Merck and Compania

0.39

Correlation Coefficient

Merck  Compania

Weak diversification

The 3 months correlation between Merck and Compania is 0.39. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Compania de Transporte in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Compania de Transporte 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 Compania. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Compania de Transporte has no effect on the direction of Merck i.e., Merck and Compania go up and down completely randomly.

Pair Corralation between Merck and Compania

Assuming the 90 days trading horizon Merck is expected to generate 2.6 times less return on investment than Compania. But when comparing it to its historical volatility, Merck Company is 1.56 times less risky than Compania. It trades about 0.09 of its potential returns per unit of risk. Compania de Transporte is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  21,950  in Compania de Transporte on November 19, 2024 and sell it today you would earn a total of  238,050  from holding Compania de Transporte or generate 1084.51% 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.  Compania de Transporte

Merck Company

Risk-Adjusted Performance

Very Weak

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

Compania de Transporte

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Compania de Transporte are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Compania sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck and Compania

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

The idea behind Merck Company and Compania de Transporte 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.