Correlation Between Merck and Holiday Island

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

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

Diversification Opportunities for Merck and Holiday Island

0.6

Correlation Coefficient

Merck  Holiday Island

Poor diversification

The 3 months correlation between Merck and Holiday is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Holiday Island Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Holiday Island Holdings 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 Holiday Island. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Holiday Island Holdings has no effect on the direction of Merck i.e., Merck and Holiday Island go up and down completely randomly.

Pair Corralation between Merck and Holiday Island

Considering the 90-day investment horizon Merck Company is expected to under-perform the Holiday Island. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 15.51 times less risky than Holiday Island. The stock trades about -0.08 of its potential returns per unit of risk. The Holiday Island Holdings is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  2.13  in Holiday Island Holdings on December 28, 2024 and sell it today you would lose (1.03) from holding Holiday Island Holdings or give up 48.36% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.36%
Values	Daily Returns

Merck Company  vs.  Holiday Island Holdings

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 uncertain 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.

Holiday Island Holdings

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Holiday Island Holdings are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite fairly weak technical indicators, Holiday Island demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck and Holiday Island

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

The idea behind Merck Company and Holiday Island Holdings 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.