Correlation Between Merck and Bank of Montreal

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

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

Diversification Opportunities for Merck and Bank of Montreal

-0.81

Correlation Coefficient

Merck  Bank of Montreal

Pay attention - limited upside

The 3 months correlation between Merck and Bank is -0.81. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Bank of Montreal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bank of Montreal 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 Bank of Montreal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bank of Montreal has no effect on the direction of Merck i.e., Merck and Bank of Montreal go up and down completely randomly.

Pair Corralation between Merck and Bank of Montreal

Considering the 90-day investment horizon Merck is expected to generate 6.47 times less return on investment than Bank of Montreal. In addition to that, Merck is 1.0 times more volatile than Bank of Montreal. It trades about 0.01 of its total potential returns per unit of risk. Bank of Montreal is currently generating about 0.05 per unit of volatility. If you would invest  8,367  in Bank of Montreal on September 4, 2024 and sell it today you would earn a total of  1,162  from holding Bank of Montreal or generate 13.89% return on investment over 90 days.

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

Merck Company  vs.  Bank of Montreal

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.

Bank of Montreal

Risk-Adjusted Performance

22 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of Montreal are ranked lower than 22 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating primary indicators, Bank of Montreal displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck and Bank of Montreal

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

The idea behind Merck Company and Bank of Montreal 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.

Check out your portfolio center.

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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.