Correlation Between Merck and Biocardia

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

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

Diversification Opportunities for Merck and Biocardia

0.87

Correlation Coefficient

Merck  Biocardia

Very poor diversification

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

Pair Corralation between Merck and Biocardia

Considering the 90-day investment horizon Merck Company is expected to generate 0.23 times more return on investment than Biocardia. However, Merck Company is 4.33 times less risky than Biocardia. It trades about -0.11 of its potential returns per unit of risk. Biocardia is currently generating about -0.03 per unit of risk. If you would invest  10,773  in Merck Company on October 5, 2024 and sell it today you would lose (856.00) from holding Merck Company or give up 7.95% of portfolio value over 90 days.

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

Merck Company  vs.  Biocardia

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.

Biocardia

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Biocardia has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest unsteady performance, the Stock's fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Merck and Biocardia

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

The idea behind Merck Company and Biocardia 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.