Correlation Between Merck and PIMCO RAFI

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

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

Diversification Opportunities for Merck and PIMCO RAFI

0.71

Correlation Coefficient

Merck  PIMCO RAFI

Poor diversification

The 3 months correlation between Merck and PIMCO is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and PIMCO RAFI Dynamic in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PIMCO RAFI Dynamic 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 PIMCO RAFI. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PIMCO RAFI Dynamic has no effect on the direction of Merck i.e., Merck and PIMCO RAFI go up and down completely randomly.

Pair Corralation between Merck and PIMCO RAFI

Considering the 90-day investment horizon Merck Company is expected to under-perform the PIMCO RAFI. In addition to that, Merck is 1.77 times more volatile than PIMCO RAFI Dynamic. It trades about -0.07 of its total potential returns per unit of risk. PIMCO RAFI Dynamic is currently generating about 0.03 per unit of volatility. If you would invest  2,870  in PIMCO RAFI Dynamic on October 22, 2024 and sell it today you would earn a total of  113.50  from holding PIMCO RAFI Dynamic or generate 3.95% return on investment over 90 days.

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

Merck Company  vs.  PIMCO RAFI Dynamic

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 weak 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.

PIMCO RAFI Dynamic

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days PIMCO RAFI Dynamic has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong fundamental indicators, PIMCO RAFI is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Merck and PIMCO RAFI

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

The idea behind Merck Company and PIMCO RAFI Dynamic 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.