Correlation Between Merck and Este Lauder

Can any of the company-specific risk be diversified away by investing in both Merck and Este Lauder 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 Este Lauder 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 Este Lauder, you can compare the effects of market volatilities on Merck and Este Lauder 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 Este Lauder. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Este Lauder.

Diversification Opportunities for Merck and Este Lauder

0.66

Correlation Coefficient

Merck  Este Lauder

Poor diversification

The 3 months correlation between Merck and Este is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and The Este Lauder in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Este Lauder 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 Este Lauder. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Este Lauder has no effect on the direction of Merck i.e., Merck and Este Lauder go up and down completely randomly.

Pair Corralation between Merck and Este Lauder

Assuming the 90 days trading horizon Merck Company is expected to under-perform the Este Lauder. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 1.5 times less risky than Este Lauder. The stock trades about -0.09 of its potential returns per unit of risk. The The Este Lauder is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  7,008  in The Este Lauder on December 29, 2024 and sell it today you would lose (948.00) from holding The Este Lauder or give up 13.53% of portfolio value over 90 days.

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

Merck Company  vs.  The Este Lauder

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. Despite latest inconsistent performance, the Stock's forward-looking signals remain strong and the recent confusion on Wall Street may also be a sign of long-lasting gains for the firm traders.

Este Lauder

Risk-Adjusted Performance

Very Weak

Over the last 90 days The Este Lauder has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest inconsistent performance, the Stock's forward indicators remain strong and the recent confusion on Wall Street may also be a sign of long-lasting gains for the firm traders.

Pair Trading with Merck and Este Lauder

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

The idea behind Merck Company and The Este Lauder 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.