Correlation Between Merck and Praxis Precision

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

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

Diversification Opportunities for Merck and Praxis Precision

-0.82

Correlation Coefficient

Merck  Praxis Precision

Pay attention - limited upside

The 3 months correlation between Merck and Praxis is -0.82. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Praxis Precision Medicines in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Praxis Precision Med 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 Praxis Precision. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Praxis Precision Med has no effect on the direction of Merck i.e., Merck and Praxis Precision go up and down completely randomly.

Pair Corralation between Merck and Praxis Precision

Considering the 90-day investment horizon Merck Company is expected to under-perform the Praxis Precision. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 3.16 times less risky than Praxis Precision. The stock trades about -0.18 of its potential returns per unit of risk. The Praxis Precision Medicines is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  5,988  in Praxis Precision Medicines on September 13, 2024 and sell it today you would earn a total of  1,525  from holding Praxis Precision Medicines or generate 25.47% return on investment over 90 days.

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

Merck Company  vs.  Praxis Precision Medicines

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 abnormal performance in the last few months, the Stock's basic indicators remain quite persistent which may send shares a bit higher in January 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

Praxis Precision Med

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Praxis Precision Medicines are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unfluctuating basic indicators, Praxis Precision showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck and Praxis Precision

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

The idea behind Merck Company and Praxis Precision Medicines 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 Companies Directory module to evaluate performance of over 100,000 Stocks, Funds, and ETFs against different fundamentals.