Correlation Between Merck and Summit Therapeutics

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

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

Diversification Opportunities for Merck and Summit Therapeutics

0.42

Correlation Coefficient

Merck  Summit Therapeutics

Very weak diversification

The 3 months correlation between Merck and Summit is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Summit Therapeutics PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Summit Therapeutics PLC 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 Summit Therapeutics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Summit Therapeutics PLC has no effect on the direction of Merck i.e., Merck and Summit Therapeutics go up and down completely randomly.

Pair Corralation between Merck and Summit Therapeutics

Considering the 90-day investment horizon Merck Company is expected to under-perform the Summit Therapeutics. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 3.3 times less risky than Summit Therapeutics. The stock trades about -0.05 of its potential returns per unit of risk. The Summit Therapeutics PLC is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  1,760  in Summit Therapeutics PLC on October 5, 2024 and sell it today you would earn a total of  25.00  from holding Summit Therapeutics PLC or generate 1.42% 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.  Summit Therapeutics PLC

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 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.

Summit Therapeutics PLC

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Summit Therapeutics PLC has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable primary indicators, Summit Therapeutics is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Merck and Summit Therapeutics

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

The idea behind Merck Company and Summit Therapeutics PLC 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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.