Correlation Between Merck and NextSource Materials

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

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

Diversification Opportunities for Merck and NextSource Materials

0.86

Correlation Coefficient

Merck  NextSource Materials

Very poor diversification

The 3 months correlation between Merck and NextSource is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and NextSource Materials in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NextSource Materials 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 NextSource Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NextSource Materials has no effect on the direction of Merck i.e., Merck and NextSource Materials go up and down completely randomly.

Pair Corralation between Merck and NextSource Materials

Considering the 90-day investment horizon Merck Company is expected to generate 0.32 times more return on investment than NextSource Materials. However, Merck Company is 3.14 times less risky than NextSource Materials. It trades about 0.1 of its potential returns per unit of risk. NextSource Materials is currently generating about 0.02 per unit of risk. If you would invest  10,073  in Merck Company on September 7, 2024 and sell it today you would earn a total of  282.00  from holding Merck Company or generate 2.8% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	95.45%
Values	Daily Returns

Merck Company  vs.  NextSource Materials

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.

NextSource Materials

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days NextSource Materials has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's fundamental indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with Merck and NextSource Materials

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

The idea behind Merck Company and NextSource Materials 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.