Correlation Between Merck and Forum Energy

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

Diversification Opportunities for Merck and Forum Energy

-0.33

Correlation Coefficient

Merck  Forum Energy

Very good diversification

The 3 months correlation between Merck and Forum is -0.33. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Forum Energy Metals in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Forum Energy Metals 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 Forum Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Forum Energy Metals has no effect on the direction of Merck i.e., Merck and Forum Energy go up and down completely randomly.

Pair Corralation between Merck and Forum Energy

Considering the 90-day investment horizon Merck Company is expected to under-perform the Forum Energy. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 7.44 times less risky than Forum Energy. The stock trades about -0.16 of its potential returns per unit of risk. The Forum Energy Metals is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  6.00  in Forum Energy Metals on September 3, 2024 and sell it today you would lose (1.00) from holding Forum Energy Metals or give up 16.67% 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.  Forum Energy Metals

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 unsteady 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.

Forum Energy Metals

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Forum Energy Metals are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile technical and fundamental indicators, Forum Energy may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Merck and Forum Energy

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

The idea behind Merck Company and Forum Energy Metals 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 Stocks Directory module to find actively traded stocks across global markets.