Correlation Between Merck and Northern Lights

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

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

Diversification Opportunities for Merck and Northern Lights

-0.77

Correlation Coefficient

Merck  Northern Lights

Pay attention - limited upside

The 3 months correlation between Merck and Northern is -0.77. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Northern Lights in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Lights 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 Northern Lights. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Lights has no effect on the direction of Merck i.e., Merck and Northern Lights go up and down completely randomly.

Pair Corralation between Merck and Northern Lights

Considering the 90-day investment horizon Merck Company is expected to under-perform the Northern Lights. In addition to that, Merck is 1.2 times more volatile than Northern Lights. It trades about 0.0 of its total potential returns per unit of risk. Northern Lights is currently generating about 0.31 per unit of volatility. If you would invest  2,619  in Northern Lights on September 3, 2024 and sell it today you would earn a total of  181.00  from holding Northern Lights or generate 6.91% return on investment over 90 days.

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

Merck Company  vs.  Northern Lights

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 unsteady 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.

Northern Lights

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Northern Lights are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of rather abnormal technical and fundamental indicators, Northern Lights may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Merck and Northern Lights

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

The idea behind Merck Company and Northern Lights 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.