Correlation Between Merck and Ellington Income

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

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

Diversification Opportunities for Merck and Ellington Income

-0.22

Correlation Coefficient

Merck  Ellington Income

Very good diversification

The 3 months correlation between Merck and Ellington is -0.22. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Ellington Income Opportunities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ellington Income Opp 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 Ellington Income. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ellington Income Opp has no effect on the direction of Merck i.e., Merck and Ellington Income go up and down completely randomly.

Pair Corralation between Merck and Ellington Income

Considering the 90-day investment horizon Merck Company is expected to generate 0.92 times more return on investment than Ellington Income. However, Merck Company is 1.08 times less risky than Ellington Income. It trades about -0.14 of its potential returns per unit of risk. Ellington Income Opportunities is currently generating about -0.22 per unit of risk. If you would invest  10,297  in Merck Company on October 8, 2024 and sell it today you would lose (325.00) from holding Merck Company or give up 3.16% of portfolio value over 90 days.

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

Merck Company  vs.  Ellington Income Opportunities

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 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.

Ellington Income Opp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Ellington Income Opportunities has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong primary indicators, Ellington Income is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Merck and Ellington Income

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

The idea behind Merck Company and Ellington Income Opportunities 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 Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.