Correlation Between Merck and Sony

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

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

Diversification Opportunities for Merck and Sony

-0.7

Correlation Coefficient

Merck  Sony

Excellent diversification

The 3 months correlation between Merck and Sony is -0.7. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Sony Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Sony Group 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 Sony. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Sony Group has no effect on the direction of Merck i.e., Merck and Sony go up and down completely randomly.

Pair Corralation between Merck and Sony

Assuming the 90 days trading horizon Merck Company is expected to under-perform the Sony. In addition to that, Merck is 1.3 times more volatile than Sony Group. It trades about -0.07 of its total potential returns per unit of risk. Sony Group is currently generating about 0.17 per unit of volatility. If you would invest  43,000  in Sony Group on December 26, 2024 and sell it today you would earn a total of  7,500  from holding Sony Group or generate 17.44% return on investment over 90 days.

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

Merck Company  vs.  Sony Group

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.

Sony Group

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Sony Group are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of very weak primary indicators, Sony displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck and Sony

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

The idea behind Merck Company and Sony Group 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.