Correlation Between Merck KGaA and Cognizant Technology

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

By analyzing existing cross correlation between Merck KGaA and Cognizant Technology Solutions, you can compare the effects of market volatilities on Merck KGaA and Cognizant Technology 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 KGaA with a short position of Cognizant Technology. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck KGaA and Cognizant Technology.

Diversification Opportunities for Merck KGaA and Cognizant Technology

-0.22

Correlation Coefficient

Merck KGaA  Cognizant Technology

Very good diversification

The 3 months correlation between Merck and Cognizant is -0.22. Overlapping area represents the amount of risk that can be diversified away by holding Merck KGaA and Cognizant Technology Solutions in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cognizant Technology and Merck KGaA 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 KGaA are associated (or correlated) with Cognizant Technology. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cognizant Technology has no effect on the direction of Merck KGaA i.e., Merck KGaA and Cognizant Technology go up and down completely randomly.

Pair Corralation between Merck KGaA and Cognizant Technology

Assuming the 90 days trading horizon Merck KGaA is expected to generate 0.85 times more return on investment than Cognizant Technology. However, Merck KGaA is 1.17 times less risky than Cognizant Technology. It trades about -0.07 of its potential returns per unit of risk. Cognizant Technology Solutions is currently generating about -0.06 per unit of risk. If you would invest  13,995  in Merck KGaA on December 24, 2024 and sell it today you would lose (855.00) from holding Merck KGaA or give up 6.11% of portfolio value over 90 days.

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

Merck KGaA  vs.  Cognizant Technology Solutions

Merck KGaA

Risk-Adjusted Performance

Very Weak

Over the last 90 days Merck KGaA has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable forward-looking signals, Merck KGaA is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Cognizant Technology

Risk-Adjusted Performance

Very Weak

Over the last 90 days Cognizant Technology Solutions has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with Merck KGaA and Cognizant Technology

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

The idea behind Merck KGaA and Cognizant Technology Solutions 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..