Correlation Between Merck and Lumen Technologies

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

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

Diversification Opportunities for Merck and Lumen Technologies

0.7

Correlation Coefficient

Merck  Lumen Technologies

Poor diversification

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

Pair Corralation between Merck and Lumen Technologies

Considering the 90-day investment horizon Merck Company is expected to generate 0.45 times more return on investment than Lumen Technologies. However, Merck Company is 2.25 times less risky than Lumen Technologies. It trades about -0.1 of its potential returns per unit of risk. Lumen Technologies is currently generating about -0.07 per unit of risk. If you would invest  9,885  in Merck Company on December 27, 2024 and sell it today you would lose (1,074) from holding Merck Company or give up 10.86% of portfolio value over 90 days.

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

Merck Company  vs.  Lumen Technologies

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.

Lumen Technologies

Risk-Adjusted Performance

Very Weak

Over the last 90 days Lumen Technologies has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's primary indicators remain very healthy which may send shares a bit higher in April 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Pair Trading with Merck and Lumen Technologies

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

The idea behind Merck Company and Lumen Technologies 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.

Check out your portfolio center.

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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.