Correlation Between Merck and JOHNSON

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Can any of the company-specific risk be diversified away by investing in both Merck and JOHNSON 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 JOHNSON into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Merck Company and JOHNSON JOHNSON 495, you can compare the effects of market volatilities on Merck and JOHNSON 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 JOHNSON. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and JOHNSON.

Diversification Opportunities for Merck and JOHNSON

0.94
  Correlation Coefficient

Almost no diversification

The 3 months correlation between Merck and JOHNSON is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and JOHNSON JOHNSON 495 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on JOHNSON JOHNSON 495 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 JOHNSON. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of JOHNSON JOHNSON 495 has no effect on the direction of Merck i.e., Merck and JOHNSON go up and down completely randomly.

Pair Corralation between Merck and JOHNSON

Considering the 90-day investment horizon Merck Company is expected to under-perform the JOHNSON. In addition to that, Merck is 1.82 times more volatile than JOHNSON JOHNSON 495. It trades about -0.19 of its total potential returns per unit of risk. JOHNSON JOHNSON 495 is currently generating about -0.13 per unit of volatility. If you would invest  10,768  in JOHNSON JOHNSON 495 on September 5, 2024 and sell it today you would lose (559.00) from holding JOHNSON JOHNSON 495 or give up 5.19% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy96.88%
ValuesDaily Returns

Merck Company  vs.  JOHNSON JOHNSON 495

 Performance 
       Timeline  
Merck Company 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days Merck Company has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak 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.
JOHNSON JOHNSON 495 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days JOHNSON JOHNSON 495 has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, JOHNSON is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Merck and JOHNSON Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Merck and JOHNSON

The main advantage of trading using opposite Merck and JOHNSON positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, JOHNSON 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 JOHNSON will offset losses from the drop in JOHNSON's long position.
The idea behind Merck Company and JOHNSON JOHNSON 495 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.

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