Correlation Between Merck and Innovator

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

By analyzing existing cross correlation between Merck Company and Innovator SP 500, you can compare the effects of market volatilities on Merck and Innovator 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 Innovator. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Innovator.

Diversification Opportunities for Merck and Innovator

-0.77

Correlation Coefficient

Merck  Innovator

Pay attention - limited upside

The 3 months correlation between Merck and Innovator is -0.77. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Innovator SP 500 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Innovator SP 500 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 Innovator. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Innovator SP 500 has no effect on the direction of Merck i.e., Merck and Innovator go up and down completely randomly.

Pair Corralation between Merck and Innovator

Considering the 90-day investment horizon Merck Company is expected to under-perform the Innovator. In addition to that, Merck is 11.0 times more volatile than Innovator SP 500. It trades about -0.05 of its total potential returns per unit of risk. Innovator SP 500 is currently generating about 0.3 per unit of volatility. If you would invest  4,769  in Innovator SP 500 on October 4, 2024 and sell it today you would earn a total of  34.00  from holding Innovator SP 500 or generate 0.71% return on investment over 90 days.

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

Merck Company  vs.  Innovator SP 500

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 weak 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.

Innovator SP 500

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Innovator SP 500 are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Innovator is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Merck and Innovator

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

The idea behind Merck Company and Innovator SP 500 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.