Correlation Between Merck and Aurora Solar

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

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

Diversification Opportunities for Merck and Aurora Solar

0.58

Correlation Coefficient

Merck  Aurora Solar

Very weak diversification

The 3 months correlation between Merck and Aurora is 0.58. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Aurora Solar Technologies in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Aurora Solar Technologies 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 Aurora Solar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Aurora Solar Technologies has no effect on the direction of Merck i.e., Merck and Aurora Solar go up and down completely randomly.

Pair Corralation between Merck and Aurora Solar

Considering the 90-day investment horizon Merck Company is expected to under-perform the Aurora Solar. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 10.47 times less risky than Aurora Solar. The stock trades about -0.09 of its potential returns per unit of risk. The Aurora Solar Technologies is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  1.95  in Aurora Solar Technologies on October 20, 2024 and sell it today you would lose (0.40) from holding Aurora Solar Technologies or give up 20.51% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.39%
Values	Daily Returns

Merck Company  vs.  Aurora Solar Technologies

Merck Company

Risk-Adjusted Performance

0 of 100

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 abnormal performance, the Stock's basic indicators remain persistent and the latest mess on Wall Street may also be a sign of long-standing gains for the company institutional investors.

Aurora Solar Technologies

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Aurora Solar Technologies are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite nearly abnormal basic indicators, Aurora Solar reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck and Aurora Solar

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

The idea behind Merck Company and Aurora Solar Technologies 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.