Correlation Between Merck and American Rare

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

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

Diversification Opportunities for Merck and American Rare

-0.56

Correlation Coefficient

Merck  American Rare

Excellent diversification

The 3 months correlation between Merck and American is -0.56. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and American Rare Earths in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Rare Earths 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 American Rare. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Rare Earths has no effect on the direction of Merck i.e., Merck and American Rare go up and down completely randomly.

Pair Corralation between Merck and American Rare

Considering the 90-day investment horizon Merck Company is expected to under-perform the American Rare. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 1.78 times less risky than American Rare. The stock trades about -0.07 of its potential returns per unit of risk. The American Rare Earths is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  17.00  in American Rare Earths on December 29, 2024 and sell it today you would earn a total of  2.00  from holding American Rare Earths or generate 11.76% return on investment over 90 days.

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

Merck Company  vs.  American Rare Earths

Merck Company

Risk-Adjusted Performance

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 uncertain 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.

American Rare Earths

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in American Rare Earths are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, American Rare reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck and American Rare

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

The idea behind Merck Company and American Rare Earths 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.