Correlation Between Merck and Industrial

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

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

Diversification Opportunities for Merck and Industrial

-0.76

Correlation Coefficient

Merck  Industrial

Pay attention - limited upside

The 3 months correlation between Merck and Industrial is -0.76. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Industrial and Commercial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Industrial and Commercial 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 Industrial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Industrial and Commercial has no effect on the direction of Merck i.e., Merck and Industrial go up and down completely randomly.

Pair Corralation between Merck and Industrial

Considering the 90-day investment horizon Merck Company is expected to under-perform the Industrial. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 1.94 times less risky than Industrial. The stock trades about -0.11 of its potential returns per unit of risk. The Industrial and Commercial is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest  59.00  in Industrial and Commercial on November 29, 2024 and sell it today you would earn a total of  16.00  from holding Industrial and Commercial or generate 27.12% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	66.1%
Values	Daily Returns

Merck Company  vs.  Industrial and Commercial

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.

Industrial and Commercial

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Industrial and Commercial are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile fundamental drivers, Industrial reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck and Industrial

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

The idea behind Merck Company and Industrial and Commercial 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.