Correlation Between Merck and Earthstone Energy

Can any of the company-specific risk be diversified away by investing in both Merck and Earthstone 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 Earthstone 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 Earthstone Energy, you can compare the effects of market volatilities on Merck and Earthstone 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 Earthstone Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Earthstone Energy.

Diversification Opportunities for Merck and Earthstone Energy

-0.65

Correlation Coefficient

Merck  Earthstone Energy

Excellent diversification

The 3 months correlation between Merck and Earthstone is -0.65. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Earthstone Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Earthstone 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 Earthstone Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Earthstone Energy has no effect on the direction of Merck i.e., Merck and Earthstone Energy go up and down completely randomly.

Pair Corralation between Merck and Earthstone Energy

If you would invest  1,532  in Earthstone Energy on August 30, 2024 and sell it today you would earn a total of  0.00  from holding Earthstone Energy or generate 0.0% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	1.59%
Values	Daily Returns

Merck Company  vs.  Earthstone Energy

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 uncertain performance in the last few months, the Stock's basic indicators remain quite persistent which may send shares a bit higher in December 2024. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

Earthstone Energy

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Merck and Earthstone Energy

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

The idea behind Merck Company and Earthstone 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 Top Crypto Exchanges module to search and analyze digital assets across top global cryptocurrency exchanges.