Correlation Between Merck and Vertex Pharmaceuticals

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

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

Diversification Opportunities for Merck and Vertex Pharmaceuticals

0.22

Correlation Coefficient

Merck  Vertex Pharmaceuticals

Modest diversification

The 3 months correlation between Merck and Vertex is 0.22. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Vertex Pharmaceuticals in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vertex Pharmaceuticals 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 Vertex Pharmaceuticals. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vertex Pharmaceuticals has no effect on the direction of Merck i.e., Merck and Vertex Pharmaceuticals go up and down completely randomly.

Pair Corralation between Merck and Vertex Pharmaceuticals

Considering the 90-day investment horizon Merck Company is expected to under-perform the Vertex Pharmaceuticals. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 1.24 times less risky than Vertex Pharmaceuticals. The stock trades about 0.0 of its potential returns per unit of risk. The Vertex Pharmaceuticals is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  31,198  in Vertex Pharmaceuticals on October 5, 2024 and sell it today you would earn a total of  9,072  from holding Vertex Pharmaceuticals or generate 29.08% return on investment over 90 days.

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

Merck Company  vs.  Vertex Pharmaceuticals

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.

Vertex Pharmaceuticals

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vertex Pharmaceuticals has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unfluctuating 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 Vertex Pharmaceuticals

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

The idea behind Merck Company and Vertex Pharmaceuticals 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.