Correlation Between Merck and Lowes Companies

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

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

Diversification Opportunities for Merck and Lowes Companies

0.09

Correlation Coefficient

Merck  Lowes Companies

Significant diversification

The 3 months correlation between Merck and Lowes is 0.09. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Lowes Companies in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lowes Companies 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 Lowes Companies. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lowes Companies has no effect on the direction of Merck i.e., Merck and Lowes Companies go up and down completely randomly.

Pair Corralation between Merck and Lowes Companies

Considering the 90-day investment horizon Merck Company is expected to under-perform the Lowes Companies. In addition to that, Merck is 1.3 times more volatile than Lowes Companies. It trades about -0.1 of its total potential returns per unit of risk. Lowes Companies is currently generating about -0.07 per unit of volatility. If you would invest  24,726  in Lowes Companies on December 27, 2024 and sell it today you would lose (1,521) from holding Lowes Companies or give up 6.15% of portfolio value over 90 days.

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

Merck Company  vs.  Lowes Companies

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.

Lowes Companies

Risk-Adjusted Performance

Very Weak

Over the last 90 days Lowes Companies has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Lowes Companies is not utilizing all of its potentials. The newest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Merck and Lowes Companies

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

The idea behind Merck Company and Lowes Companies 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.