Correlation Between Merck and Cenovus Energy

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

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

Diversification Opportunities for Merck and Cenovus Energy

0.04

Correlation Coefficient

Merck  Cenovus Energy

Significant diversification

The 3 months correlation between Merck and Cenovus is 0.04. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Cenovus Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cenovus Energy 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 Cenovus Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cenovus Energy has no effect on the direction of Merck i.e., Merck and Cenovus Energy go up and down completely randomly.

Pair Corralation between Merck and Cenovus Energy

Considering the 90-day investment horizon Merck Company is expected to under-perform the Cenovus Energy. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 1.2 times less risky than Cenovus Energy. The stock trades about -0.08 of its potential returns per unit of risk. The Cenovus Energy is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  1,469  in Cenovus Energy on December 28, 2024 and sell it today you would lose (80.00) from holding Cenovus Energy or give up 5.45% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	98.36%
Values	Daily Returns

Merck Company  vs.  Cenovus Energy

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 uncertain 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.

Cenovus Energy

Risk-Adjusted Performance

Very Weak

Over the last 90 days Cenovus Energy has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Cenovus Energy is not utilizing all of its potentials. The recent stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Merck and Cenovus Energy

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

The idea behind Merck Company and Cenovus Energy 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.