Correlation Between Merck and GSK Plc

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

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

Diversification Opportunities for Merck and GSK Plc

0.94

Correlation Coefficient

Merck  GSK Plc

Almost no diversification

The 3 months correlation between Merck and GSK is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and GSK plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on GSK plc 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 GSK Plc. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of GSK plc has no effect on the direction of Merck i.e., Merck and GSK Plc go up and down completely randomly.

Pair Corralation between Merck and GSK Plc

Considering the 90-day investment horizon Merck Company is expected to generate 0.58 times more return on investment than GSK Plc. However, Merck Company is 1.72 times less risky than GSK Plc. It trades about 0.13 of its potential returns per unit of risk. GSK plc is currently generating about -0.04 per unit of risk. If you would invest  9,836  in Merck Company on September 15, 2024 and sell it today you would earn a total of  364.00  from holding Merck Company or generate 3.7% return on investment over 90 days.

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

Merck Company  vs.  GSK plc

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 January 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

GSK plc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days GSK plc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Merck and GSK Plc

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

The idea behind Merck Company and GSK plc 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.