Correlation Between Merck and New Oriental

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

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

Diversification Opportunities for Merck and New Oriental

0.19

Correlation Coefficient

Merck  New Oriental

Average diversification

The 3 months correlation between Merck and New is 0.19. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and New Oriental Education in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on New Oriental Education 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 New Oriental. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of New Oriental Education has no effect on the direction of Merck i.e., Merck and New Oriental go up and down completely randomly.

Pair Corralation between Merck and New Oriental

Assuming the 90 days trading horizon Merck Company is expected to under-perform the New Oriental. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 1.46 times less risky than New Oriental. The stock trades about -0.09 of its potential returns per unit of risk. The New Oriental Education is currently generating about 0.0 of returns per unit of risk over similar time horizon. If you would invest  128,196  in New Oriental Education on September 4, 2024 and sell it today you would lose (1,596) from holding New Oriental Education or give up 1.24% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	98.39%
Values	Daily Returns

Merck Company  vs.  New Oriental Education

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. 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.

New Oriental Education

Risk-Adjusted Performance

0 of 100

Very Weak

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

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

The idea behind Merck Company and New Oriental Education 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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.