Correlation Between Merck and Petroleo Brasileiro

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

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

Diversification Opportunities for Merck and Petroleo Brasileiro

0.51

Correlation Coefficient

Merck  Petroleo Brasileiro

Very weak diversification

The 3 months correlation between Merck and Petroleo is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Petroleo Brasileiro Petrobras in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Petroleo Brasileiro 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 Petroleo Brasileiro. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Petroleo Brasileiro has no effect on the direction of Merck i.e., Merck and Petroleo Brasileiro go up and down completely randomly.

Pair Corralation between Merck and Petroleo Brasileiro

Considering the 90-day investment horizon Merck Company is expected to under-perform the Petroleo Brasileiro. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 1.56 times less risky than Petroleo Brasileiro. The stock trades about -0.05 of its potential returns per unit of risk. The Petroleo Brasileiro Petrobras is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  1,315  in Petroleo Brasileiro Petrobras on October 4, 2024 and sell it today you would lose (0.50) from holding Petroleo Brasileiro Petrobras or give up 0.04% of portfolio value over 90 days.

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

Merck Company  vs.  Petroleo Brasileiro Petrobras

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.

Petroleo Brasileiro

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Petroleo Brasileiro Petrobras has generated negative risk-adjusted returns adding no value to investors with long positions. Even with latest unsteady performance, the Stock's fundamental drivers remain invariable and the latest agitation on Wall Street may also be a sign of long-running gains for the enterprise retail investors.

Pair Trading with Merck and Petroleo Brasileiro

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

The idea behind Merck Company and Petroleo Brasileiro Petrobras 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 Financial Widgets module to easily integrated Macroaxis content with over 30 different plug-and-play financial widgets.