Correlation Between Merck and Searchlight Resources

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

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

Diversification Opportunities for Merck and Searchlight Resources

0.58

Correlation Coefficient

Merck  Searchlight Resources

Very weak diversification

The 3 months correlation between Merck and Searchlight is 0.58. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Searchlight Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Searchlight Resources 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 Searchlight Resources. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Searchlight Resources has no effect on the direction of Merck i.e., Merck and Searchlight Resources go up and down completely randomly.

Pair Corralation between Merck and Searchlight Resources

Considering the 90-day investment horizon Merck is expected to generate 22.82 times less return on investment than Searchlight Resources. But when comparing it to its historical volatility, Merck Company is 15.36 times less risky than Searchlight Resources. It trades about 0.08 of its potential returns per unit of risk. Searchlight Resources is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  0.60  in Searchlight Resources on September 13, 2024 and sell it today you would earn a total of  0.14  from holding Searchlight Resources or generate 23.33% return on investment over 90 days.

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

Merck Company  vs.  Searchlight Resources

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.

Searchlight Resources

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Searchlight Resources are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Searchlight Resources reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck and Searchlight Resources

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

The idea behind Merck Company and Searchlight Resources 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.