Correlation Between Merck and Liontown Resources

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

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

Diversification Opportunities for Merck and Liontown Resources

-0.56

Correlation Coefficient

Merck  Liontown Resources

Excellent diversification

The 3 months correlation between Merck and Liontown is -0.56. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Liontown Resources Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Liontown Resources 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 Liontown Resources. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Liontown Resources has no effect on the direction of Merck i.e., Merck and Liontown Resources go up and down completely randomly.

Pair Corralation between Merck and Liontown Resources

Considering the 90-day investment horizon Merck Company is expected to under-perform the Liontown Resources. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 4.17 times less risky than Liontown Resources. The stock trades about -0.16 of its potential returns per unit of risk. The Liontown Resources Limited is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  44.00  in Liontown Resources Limited on September 2, 2024 and sell it today you would earn a total of  7.00  from holding Liontown Resources Limited or generate 15.91% return on investment over 90 days.

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

Merck Company  vs.  Liontown Resources Limited

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.

Liontown Resources

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Liontown Resources Limited are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Liontown Resources reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck and Liontown Resources

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

The idea behind Merck Company and Liontown Resources Limited 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.