Correlation Between Merck and Jazz Pharmaceuticals

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

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

Diversification Opportunities for Merck and Jazz Pharmaceuticals

-0.7

Correlation Coefficient

Merck  Jazz Pharmaceuticals

Excellent diversification

The 3 months correlation between Merck and Jazz is -0.7. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Jazz Pharmaceuticals PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Jazz Pharmaceuticals 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 Jazz Pharmaceuticals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Jazz Pharmaceuticals PLC has no effect on the direction of Merck i.e., Merck and Jazz Pharmaceuticals go up and down completely randomly.

Pair Corralation between Merck and Jazz Pharmaceuticals

Considering the 90-day investment horizon Merck is expected to generate 6.39 times less return on investment than Jazz Pharmaceuticals. But when comparing it to its historical volatility, Merck Company is 1.34 times less risky than Jazz Pharmaceuticals. It trades about 0.0 of its potential returns per unit of risk. Jazz Pharmaceuticals PLC is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  12,126  in Jazz Pharmaceuticals PLC on October 5, 2024 and sell it today you would lose (20.00) from holding Jazz Pharmaceuticals PLC or give up 0.16% of portfolio value over 90 days.

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

Merck Company  vs.  Jazz Pharmaceuticals 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 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.

Jazz Pharmaceuticals PLC

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Jazz Pharmaceuticals PLC are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Jazz Pharmaceuticals showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck and Jazz Pharmaceuticals

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

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