Correlation Between Merck KGaA and Evotec SE

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

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

Diversification Opportunities for Merck KGaA and Evotec SE

-0.87

Correlation Coefficient

Merck KGaA  Evotec SE

Pay attention - limited upside

The 3 months correlation between Merck and Evotec is -0.87. Overlapping area represents the amount of risk that can be diversified away by holding Merck KGaA and Evotec SE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Evotec SE 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 Evotec SE. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Evotec SE has no effect on the direction of Merck KGaA i.e., Merck KGaA and Evotec SE go up and down completely randomly.

Pair Corralation between Merck KGaA and Evotec SE

Assuming the 90 days trading horizon Merck KGaA is expected to generate 0.39 times more return on investment than Evotec SE. However, Merck KGaA is 2.58 times less risky than Evotec SE. It trades about -0.02 of its potential returns per unit of risk. Evotec SE is currently generating about -0.02 per unit of risk. If you would invest  17,912  in Merck KGaA on September 26, 2024 and sell it today you would lose (4,127) from holding Merck KGaA or give up 23.04% of portfolio value over 90 days.

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

Merck KGaA  vs.  Evotec 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.

Evotec SE

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Evotec SE are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Evotec SE unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck KGaA and Evotec SE

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

The idea behind Merck KGaA and Evotec 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.

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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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.