Correlation Between Merck and Tomra Systems

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

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

Diversification Opportunities for Merck and Tomra Systems

0.75

Correlation Coefficient

Merck  Tomra Systems

Poor diversification

The 3 months correlation between Merck and Tomra is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Tomra Systems ASA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tomra Systems ASA 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 Tomra Systems. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tomra Systems ASA has no effect on the direction of Merck i.e., Merck and Tomra Systems go up and down completely randomly.

Pair Corralation between Merck and Tomra Systems

Considering the 90-day investment horizon Merck Company is expected to under-perform the Tomra Systems. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 2.06 times less risky than Tomra Systems. The stock trades about -0.18 of its potential returns per unit of risk. The Tomra Systems ASA is currently generating about -0.06 of returns per unit of risk over similar time horizon. If you would invest  1,497  in Tomra Systems ASA on September 13, 2024 and sell it today you would lose (160.00) from holding Tomra Systems ASA or give up 10.69% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.44%
Values	Daily Returns

Merck Company  vs.  Tomra Systems ASA

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.

Tomra Systems ASA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Tomra Systems ASA has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest inconsistent performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Merck and Tomra Systems

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

The idea behind Merck Company and Tomra Systems ASA 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.