Correlation Between Merck and Tempest Therapeutics

Can any of the company-specific risk be diversified away by investing in both Merck and Tempest 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 Tempest 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 Tempest Therapeutics, you can compare the effects of market volatilities on Merck and Tempest 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 Tempest Therapeutics. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Tempest Therapeutics.

Diversification Opportunities for Merck and Tempest Therapeutics

0.8

Correlation Coefficient

Merck  Tempest Therapeutics

Very poor diversification

The 3 months correlation between Merck and Tempest is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Tempest Therapeutics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tempest Therapeutics 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 Tempest Therapeutics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tempest Therapeutics has no effect on the direction of Merck i.e., Merck and Tempest Therapeutics go up and down completely randomly.

Pair Corralation between Merck and Tempest Therapeutics

Considering the 90-day investment horizon Merck Company is expected to generate 0.21 times more return on investment than Tempest Therapeutics. However, Merck Company is 4.8 times less risky than Tempest Therapeutics. It trades about 0.0 of its potential returns per unit of risk. Tempest Therapeutics is currently generating about -0.05 per unit of risk. If you would invest  10,087  in Merck Company on October 5, 2024 and sell it today you would lose (170.00) from holding Merck Company or give up 1.69% of portfolio value over 90 days.

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

Merck Company  vs.  Tempest Therapeutics

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.

Tempest Therapeutics

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Tempest Therapeutics has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's basic indicators remain comparatively stable which may send shares a bit higher in February 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

Pair Trading with Merck and Tempest Therapeutics

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

The idea behind Merck Company and Tempest Therapeutics 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.

Check out your portfolio center.

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 Sync Your Broker module to sync your existing holdings, watchlists, positions or portfolios from thousands of online brokerage services, banks, investment account aggregators and robo-advisors..