Correlation Between Merck and Sanofi

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

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

Diversification Opportunities for Merck and Sanofi

-0.61

Correlation Coefficient

Merck  Sanofi

Excellent diversification

The 3 months correlation between Merck and Sanofi is -0.61. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Sanofi in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sanofi 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 Sanofi. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sanofi has no effect on the direction of Merck i.e., Merck and Sanofi go up and down completely randomly.

Pair Corralation between Merck and Sanofi

Assuming the 90 days trading horizon Merck Company is expected to under-perform the Sanofi. In addition to that, Merck is 1.35 times more volatile than Sanofi. It trades about -0.09 of its total potential returns per unit of risk. Sanofi is currently generating about 0.14 per unit of volatility. If you would invest  98,950  in Sanofi on November 28, 2024 and sell it today you would earn a total of  12,550  from holding Sanofi or generate 12.68% return on investment over 90 days.

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

Merck Company  vs.  Sanofi

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.

Sanofi

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Sanofi are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Sanofi showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck and Sanofi

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

The idea behind Merck Company and Sanofi 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.