Correlation Between Merck and China Fund

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

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

Diversification Opportunities for Merck and China Fund

-0.42

Correlation Coefficient

Merck  China Fund

Very good diversification

The 3 months correlation between Merck and China is -0.42. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and China Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Fund 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 China Fund. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Fund has no effect on the direction of Merck i.e., Merck and China Fund go up and down completely randomly.

Pair Corralation between Merck and China Fund

Considering the 90-day investment horizon Merck Company is expected to under-perform the China Fund. In addition to that, Merck is 1.01 times more volatile than China Fund. It trades about -0.1 of its total potential returns per unit of risk. China Fund is currently generating about 0.08 per unit of volatility. If you would invest  1,217  in China Fund on December 27, 2024 and sell it today you would earn a total of  97.00  from holding China Fund or generate 7.97% return on investment over 90 days.

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

Merck Company  vs.  China Fund

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 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.

China Fund

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in China Fund are ranked lower than 6 (%) of all funds and portfolios of funds over the last 90 days. In spite of very fragile technical indicators, China Fund may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Merck and China Fund

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

The idea behind Merck Company and China Fund 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.