Correlation Between Merck and Royce Small-cap

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

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

Diversification Opportunities for Merck and Royce Small-cap

0.23

Correlation Coefficient

Merck  Royce Small-cap

Modest diversification

The 3 months correlation between Merck and Royce is 0.23. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Royce Small Cap Value in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Royce Small Cap 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 Royce Small-cap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Royce Small Cap has no effect on the direction of Merck i.e., Merck and Royce Small-cap go up and down completely randomly.

Pair Corralation between Merck and Royce Small-cap

Considering the 90-day investment horizon Merck Company is expected to generate 1.59 times more return on investment than Royce Small-cap. However, Merck is 1.59 times more volatile than Royce Small Cap Value. It trades about -0.06 of its potential returns per unit of risk. Royce Small Cap Value is currently generating about -0.13 per unit of risk. If you would invest  9,901  in Merck Company on December 25, 2024 and sell it today you would lose (670.00) from holding Merck Company or give up 6.77% of portfolio value over 90 days.

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

Merck Company  vs.  Royce Small Cap Value

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.

Royce Small Cap

Risk-Adjusted Performance

Very Weak

Over the last 90 days Royce Small Cap Value has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's technical and fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Pair Trading with Merck and Royce Small-cap

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

The idea behind Merck Company and Royce Small Cap Value 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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.