Correlation Between Merck and Novartis

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

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

Diversification Opportunities for Merck and Novartis

-0.31

Correlation Coefficient

Merck  Novartis

Very good diversification

The 3 months correlation between Merck and Novartis is -0.31. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Novartis AG ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Novartis AG ADR 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 Novartis. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Novartis AG ADR has no effect on the direction of Merck i.e., Merck and Novartis go up and down completely randomly.

Pair Corralation between Merck and Novartis

Considering the 90-day investment horizon Merck Company is expected to under-perform the Novartis. In addition to that, Merck is 1.35 times more volatile than Novartis AG ADR. It trades about -0.07 of its total potential returns per unit of risk. Novartis AG ADR is currently generating about 0.23 per unit of volatility. If you would invest  9,395  in Novartis AG ADR on December 28, 2024 and sell it today you would earn a total of  1,862  from holding Novartis AG ADR or generate 19.82% return on investment over 90 days.

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

Merck Company  vs.  Novartis AG ADR

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 uncertain 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.

Novartis AG ADR

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Novartis AG ADR are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating basic indicators, Novartis unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck and Novartis

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

The idea behind Merck Company and Novartis AG ADR 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 Sync Your Broker module to sync your existing holdings, watchlists, positions or portfolios from thousands of online brokerage services, banks, investment account aggregators and robo-advisors..