Correlation Between Merck and Legg Mason

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

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

Diversification Opportunities for Merck and Legg Mason

-0.35

Correlation Coefficient

Merck  Legg Mason

Very good diversification

The 3 months correlation between Merck and Legg is -0.35. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Legg Mason Partners in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Legg Mason Partners 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 Legg Mason. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Legg Mason Partners has no effect on the direction of Merck i.e., Merck and Legg Mason go up and down completely randomly.

Pair Corralation between Merck and Legg Mason

Considering the 90-day investment horizon Merck Company is expected to under-perform the Legg Mason. In addition to that, Merck is 1.89 times more volatile than Legg Mason Partners. It trades about -0.1 of its total potential returns per unit of risk. Legg Mason Partners is currently generating about -0.04 per unit of volatility. If you would invest  1,589  in Legg Mason Partners on December 27, 2024 and sell it today you would lose (40.00) from holding Legg Mason Partners or give up 2.52% of portfolio value over 90 days.

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

Merck Company  vs.  Legg Mason Partners

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 abnormal 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.

Legg Mason Partners

Risk-Adjusted Performance

Very Weak

Over the last 90 days Legg Mason Partners has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong primary indicators, Legg Mason is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Merck and Legg Mason

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

The idea behind Merck Company and Legg Mason Partners 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.