Correlation Between Merck and KANSAS

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

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

Diversification Opportunities for Merck and KANSAS

-0.76

Correlation Coefficient

Merck  KANSAS

Pay attention - limited upside

The 3 months correlation between Merck and KANSAS is -0.76. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and KANSAS CITY SOUTHN in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on KANSAS CITY SOUTHN 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 KANSAS. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of KANSAS CITY SOUTHN has no effect on the direction of Merck i.e., Merck and KANSAS go up and down completely randomly.

Pair Corralation between Merck and KANSAS

Considering the 90-day investment horizon Merck Company is expected to under-perform the KANSAS. In addition to that, Merck is 1.77 times more volatile than KANSAS CITY SOUTHN. It trades about -0.13 of its total potential returns per unit of risk. KANSAS CITY SOUTHN is currently generating about -0.13 per unit of volatility. If you would invest  9,837  in KANSAS CITY SOUTHN on September 9, 2024 and sell it today you would lose (121.00) from holding KANSAS CITY SOUTHN or give up 1.23% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	21.54%
Values	Daily Returns

Merck Company  vs.  KANSAS CITY SOUTHN

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 weak 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.

KANSAS CITY SOUTHN

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Merck and KANSAS

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

The idea behind Merck Company and KANSAS CITY SOUTHN 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.