Correlation Between Merck and Bank of Nova Scotia

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

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

Diversification Opportunities for Merck and Bank of Nova Scotia

0.24

Correlation Coefficient

Merck  Bank of Nova Scotia

Modest diversification

The 3 months correlation between Merck and Bank is 0.24. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and The Bank of in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bank of Nova Scotia 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 Bank of Nova Scotia. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bank of Nova Scotia has no effect on the direction of Merck i.e., Merck and Bank of Nova Scotia go up and down completely randomly.

Pair Corralation between Merck and Bank of Nova Scotia

Assuming the 90 days trading horizon Merck Company is expected to under-perform the Bank of Nova Scotia. In addition to that, Merck is 2.73 times more volatile than The Bank of. It trades about -0.08 of its total potential returns per unit of risk. The Bank of is currently generating about -0.09 per unit of volatility. If you would invest  108,499  in The Bank of on December 29, 2024 and sell it today you would lose (4,999) from holding The Bank of or give up 4.61% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.41%
Values	Daily Returns

Merck Company  vs.  The Bank of

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 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.

Bank of Nova Scotia

Risk-Adjusted Performance

Very Weak

Over the last 90 days The Bank of has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Bank of Nova Scotia 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 Bank of Nova Scotia

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

The idea behind Merck Company and The Bank of 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.