Correlation Between Merck KGaA and CN DATANG

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

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

Diversification Opportunities for Merck KGaA and CN DATANG

-0.53

Correlation Coefficient

Merck KGaA  CN DATANG

Excellent diversification

The 3 months correlation between Merck and DT7 is -0.53. Overlapping area represents the amount of risk that can be diversified away by holding Merck KGaA and CN DATANG C in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CN DATANG C 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 CN DATANG. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CN DATANG C has no effect on the direction of Merck KGaA i.e., Merck KGaA and CN DATANG go up and down completely randomly.

Pair Corralation between Merck KGaA and CN DATANG

Assuming the 90 days trading horizon Merck KGaA is expected to under-perform the CN DATANG. But the stock apears to be less risky and, when comparing its historical volatility, Merck KGaA is 2.7 times less risky than CN DATANG. The stock trades about -0.02 of its potential returns per unit of risk. The CN DATANG C is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  14.00  in CN DATANG C on October 24, 2024 and sell it today you would earn a total of  10.00  from holding CN DATANG C or generate 71.43% return on investment over 90 days.

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

Merck KGaA  vs.  CN DATANG C

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 latest fragile performance, the Stock's forward-looking signals remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

CN DATANG C

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in CN DATANG C are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, CN DATANG may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with Merck KGaA and CN DATANG

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

The idea behind Merck KGaA and CN DATANG C 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.