Correlation Between Merck KGaA and Dermapharm Holding

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

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

Diversification Opportunities for Merck KGaA and Dermapharm Holding

-0.75

Correlation Coefficient

Merck KGaA  Dermapharm Holding

Pay attention - limited upside

The 3 months correlation between Merck and Dermapharm is -0.75. Overlapping area represents the amount of risk that can be diversified away by holding Merck KGaA and Dermapharm Holding SE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dermapharm Holding 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 Dermapharm Holding. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dermapharm Holding has no effect on the direction of Merck KGaA i.e., Merck KGaA and Dermapharm Holding go up and down completely randomly.

Pair Corralation between Merck KGaA and Dermapharm Holding

Assuming the 90 days trading horizon Merck KGaA is expected to under-perform the Dermapharm Holding. But the stock apears to be less risky and, when comparing its historical volatility, Merck KGaA is 1.1 times less risky than Dermapharm Holding. The stock trades about -0.02 of its potential returns per unit of risk. The Dermapharm Holding SE is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  3,625  in Dermapharm Holding SE on September 26, 2024 and sell it today you would earn a total of  155.00  from holding Dermapharm Holding SE or generate 4.28% return on investment over 90 days.

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

Merck KGaA  vs.  Dermapharm Holding SE

Merck KGaA

Risk-Adjusted Performance

0 of 100

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 fragile performance in the last few months, the Stock's forward-looking signals remain comparatively stable which may send shares a bit higher in January 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

Dermapharm Holding

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Dermapharm Holding SE are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Dermapharm Holding may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Merck KGaA and Dermapharm Holding

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

The idea behind Merck KGaA and Dermapharm Holding SE 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.