Correlation Between Merck and Biogen

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

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

Diversification Opportunities for Merck and Biogen

0.91

Correlation Coefficient

Merck  Biogen

Almost no diversification

The 3 months correlation between Merck and Biogen is 0.91. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Biogen Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Biogen Inc 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 Biogen. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Biogen Inc has no effect on the direction of Merck i.e., Merck and Biogen go up and down completely randomly.

Pair Corralation between Merck and Biogen

Considering the 90-day investment horizon Merck Company is expected to generate 0.89 times more return on investment than Biogen. However, Merck Company is 1.12 times less risky than Biogen. It trades about -0.17 of its potential returns per unit of risk. Biogen Inc is currently generating about -0.25 per unit of risk. If you would invest  11,448  in Merck Company on September 12, 2024 and sell it today you would lose (1,473) from holding Merck Company or give up 12.87% of portfolio value over 90 days.

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

Merck Company  vs.  Biogen Inc

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 weak performance in the last few months, the Stock's basic indicators remain quite persistent which may send shares a bit higher in January 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

Biogen Inc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Biogen Inc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's forward indicators remain somewhat strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with Merck and Biogen

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

The idea behind Merck Company and Biogen Inc 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.