Correlation Between Merck and ALPS

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

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

Diversification Opportunities for Merck and ALPS

-0.51

Correlation Coefficient

Merck  ALPS

Excellent diversification

The 3 months correlation between Merck and ALPS is -0.51. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and ALPS in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ALPS 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 ALPS. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ALPS has no effect on the direction of Merck i.e., Merck and ALPS go up and down completely randomly.

Pair Corralation between Merck and ALPS

Considering the 90-day investment horizon Merck is expected to generate 5.3 times less return on investment than ALPS. In addition to that, Merck is 1.17 times more volatile than ALPS. It trades about 0.01 of its total potential returns per unit of risk. ALPS is currently generating about 0.07 per unit of volatility. If you would invest  2,210  in ALPS on September 21, 2024 and sell it today you would earn a total of  379.00  from holding ALPS or generate 17.15% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	84.76%
Values	Daily Returns

Merck Company  vs.  ALPS

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 uncertain performance in the last few months, the Stock's basic indicators remain quite persistent which may send shares a bit higher in January 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

ALPS

Risk-Adjusted Performance

0 of 100

Solid

Over the last 90 days ALPS has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly weak basic indicators, ALPS showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck and ALPS

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

The idea behind Merck Company and ALPS 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.