Correlation Between Merck and Imperial Oil

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

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

Diversification Opportunities for Merck and Imperial Oil

-0.32

Correlation Coefficient

Merck  Imperial Oil

Very good diversification

The 3 months correlation between Merck and Imperial is -0.32. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Imperial Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Imperial Oil 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 Imperial Oil. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Imperial Oil has no effect on the direction of Merck i.e., Merck and Imperial Oil go up and down completely randomly.

Pair Corralation between Merck and Imperial Oil

Considering the 90-day investment horizon Merck Company is expected to under-perform the Imperial Oil. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 1.06 times less risky than Imperial Oil. The stock trades about -0.07 of its potential returns per unit of risk. The Imperial Oil is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  6,066  in Imperial Oil on December 28, 2024 and sell it today you would earn a total of  1,018  from holding Imperial Oil or generate 16.78% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Merck Company  vs.  Imperial Oil

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.

Imperial Oil

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Imperial Oil are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of very uncertain primary indicators, Imperial Oil displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck and Imperial Oil

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

The idea behind Merck Company and Imperial Oil 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.