Correlation Between Merck and Meta Platforms

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

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

Diversification Opportunities for Merck and Meta Platforms

-0.53

Correlation Coefficient

Merck  Meta Platforms

Excellent diversification

The 3 months correlation between Merck and Meta is -0.53. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Meta Platforms in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Meta Platforms 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 Meta Platforms. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Meta Platforms has no effect on the direction of Merck i.e., Merck and Meta Platforms go up and down completely randomly.

Pair Corralation between Merck and Meta Platforms

Considering the 90-day investment horizon Merck Company is expected to under-perform the Meta Platforms. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 1.26 times less risky than Meta Platforms. The stock trades about -0.11 of its potential returns per unit of risk. The Meta Platforms is currently generating about 0.09 of returns per unit of risk over similar time horizon. If you would invest  47,656  in Meta Platforms on September 1, 2024 and sell it today you would earn a total of  9,776  from holding Meta Platforms or generate 20.51% 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.  Meta Platforms

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.

Meta Platforms

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Meta Platforms are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Meta Platforms may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Merck and Meta Platforms

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

The idea behind Merck Company and Meta Platforms 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.