Correlation Between Merck and KAUFMAN ET

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

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

Diversification Opportunities for Merck and KAUFMAN ET

-0.18

Correlation Coefficient

Merck  KAUFMAN ET

Good diversification

The 3 months correlation between Merck and KAUFMAN is -0.18. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and KAUFMAN ET BROAD in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on KAUFMAN ET BROAD 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 KAUFMAN ET. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of KAUFMAN ET BROAD has no effect on the direction of Merck i.e., Merck and KAUFMAN ET go up and down completely randomly.

Pair Corralation between Merck and KAUFMAN ET

Assuming the 90 days trading horizon Merck Company is expected to under-perform the KAUFMAN ET. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 1.09 times less risky than KAUFMAN ET. The stock trades about -0.07 of its potential returns per unit of risk. The KAUFMAN ET BROAD is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  3,175  in KAUFMAN ET BROAD on December 29, 2024 and sell it today you would earn a total of  10.00  from holding KAUFMAN ET BROAD or generate 0.31% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.44%
Values	Daily Returns

Merck Company  vs.  KAUFMAN ET BROAD

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. In spite of rather sound forward-looking signals, Merck is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

KAUFMAN ET BROAD

Risk-Adjusted Performance

Very Weak

Over the last 90 days KAUFMAN ET BROAD has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical indicators, KAUFMAN ET is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Merck and KAUFMAN ET

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

The idea behind Merck Company and KAUFMAN ET BROAD 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.