Correlation Between Merck and VanEck Semiconductor

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

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

Diversification Opportunities for Merck and VanEck Semiconductor

0.03

Correlation Coefficient

Merck  VanEck Semiconductor

Significant diversification

The 3 months correlation between Merck and VanEck is 0.03. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and VanEck Semiconductor ETF in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on VanEck Semiconductor ETF 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 VanEck Semiconductor. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of VanEck Semiconductor ETF has no effect on the direction of Merck i.e., Merck and VanEck Semiconductor go up and down completely randomly.

Pair Corralation between Merck and VanEck Semiconductor

Considering the 90-day investment horizon Merck Company is expected to under-perform the VanEck Semiconductor. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 1.35 times less risky than VanEck Semiconductor. The stock trades about -0.1 of its potential returns per unit of risk. The VanEck Semiconductor ETF is currently generating about -0.06 of returns per unit of risk over similar time horizon. If you would invest  24,840  in VanEck Semiconductor ETF on December 27, 2024 and sell it today you would lose (2,639) from holding VanEck Semiconductor ETF or give up 10.62% of portfolio value over 90 days.

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

Merck Company  vs.  VanEck Semiconductor ETF

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.

VanEck Semiconductor ETF

Risk-Adjusted Performance

Very Weak

Over the last 90 days VanEck Semiconductor ETF has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Etf's primary indicators remain strong and the recent confusion on Wall Street may also be a sign of long-lasting gains for the Etf traders.

Pair Trading with Merck and VanEck Semiconductor

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

The idea behind Merck Company and VanEck Semiconductor ETF 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 Dashboard module to portfolio dashboard that provides centralized access to all your investments.