Correlation Between Merck and IPath Series

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

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

Diversification Opportunities for Merck and IPath Series

-0.16

Correlation Coefficient

Merck  IPath Series

Good diversification

The 3 months correlation between Merck and IPath is -0.16. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and iPath Series B in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iPath Series B 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 IPath Series. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iPath Series B has no effect on the direction of Merck i.e., Merck and IPath Series go up and down completely randomly.

Pair Corralation between Merck and IPath Series

Considering the 90-day investment horizon Merck Company is expected to under-perform the IPath Series. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 1.12 times less risky than IPath Series. The stock trades about -0.1 of its potential returns per unit of risk. The iPath Series B is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  2,781  in iPath Series B on December 27, 2024 and sell it today you would lose (15.00) from holding iPath Series B or give up 0.54% 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.  iPath Series B

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 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.

iPath Series B

Risk-Adjusted Performance

Very Weak

Over the last 90 days iPath Series B has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, IPath Series is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Merck and IPath Series

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

The idea behind Merck Company and iPath Series B 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 Share Portfolio module to track or share privately all of your investments from the convenience of any device.