Correlation Between Merck and Entrada Therapeutics

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

Diversification Opportunities for Merck and Entrada Therapeutics

-0.81

Correlation Coefficient

Merck  Entrada Therapeutics

Pay attention - limited upside

The 3 months correlation between Merck and Entrada is -0.81. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Entrada Therapeutics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Entrada 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 Entrada Therapeutics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Entrada Therapeutics has no effect on the direction of Merck i.e., Merck and Entrada Therapeutics go up and down completely randomly.

Pair Corralation between Merck and Entrada Therapeutics

Considering the 90-day investment horizon Merck Company is expected to under-perform the Entrada Therapeutics. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 1.93 times less risky than Entrada Therapeutics. The stock trades about -0.05 of its potential returns per unit of risk. The Entrada Therapeutics is currently generating about 0.26 of returns per unit of risk over similar time horizon. If you would invest  1,723  in Entrada Therapeutics on August 31, 2024 and sell it today you would earn a total of  260.00  from holding Entrada Therapeutics or generate 15.09% return on investment over 90 days.

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

Merck Company  vs.  Entrada 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.

Entrada Therapeutics

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Entrada Therapeutics are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite somewhat unfluctuating fundamental indicators, Entrada Therapeutics sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck and Entrada Therapeutics

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

The idea behind Merck Company and Entrada 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.

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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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.