Correlation Between Merck and Elanco Animal

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

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

Diversification Opportunities for Merck and Elanco Animal

0.12

Correlation Coefficient

Merck  Elanco Animal

Average diversification

The 3 months correlation between Merck and Elanco is 0.12. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Elanco Animal Health in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Elanco Animal Health 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 Elanco Animal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Elanco Animal Health has no effect on the direction of Merck i.e., Merck and Elanco Animal go up and down completely randomly.

Pair Corralation between Merck and Elanco Animal

Assuming the 90 days horizon Merck Company is expected to generate 0.51 times more return on investment than Elanco Animal. However, Merck Company is 1.98 times less risky than Elanco Animal. It trades about -0.08 of its potential returns per unit of risk. Elanco Animal Health is currently generating about -0.06 per unit of risk. If you would invest  17,140  in Merck Company on September 15, 2024 and sell it today you would lose (2,875) from holding Merck Company or give up 16.77% of portfolio value over 90 days.

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

Merck Company  vs.  Elanco Animal Health

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 fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Elanco Animal Health

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Elanco Animal Health has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Elanco Animal is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Merck and Elanco Animal

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

The idea behind Merck Company and Elanco Animal Health 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.