Correlation Between Merck and Western Midstream

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

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

Diversification Opportunities for Merck and Western Midstream

0.05

Correlation Coefficient

Merck  Western Midstream

Significant diversification

The 3 months correlation between Merck and Western is 0.05. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Western Midstream Partners in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Western Midstream 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 Western Midstream. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Western Midstream has no effect on the direction of Merck i.e., Merck and Western Midstream go up and down completely randomly.

Pair Corralation between Merck and Western Midstream

Considering the 90-day investment horizon Merck Company is expected to under-perform the Western Midstream. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 1.15 times less risky than Western Midstream. The stock trades about -0.16 of its potential returns per unit of risk. The Western Midstream Partners is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  3,709  in Western Midstream Partners on September 3, 2024 and sell it today you would earn a total of  362.00  from holding Western Midstream Partners or generate 9.76% return on investment over 90 days.

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

Merck Company  vs.  Western Midstream Partners

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 unsteady 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.

Western Midstream

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Western Midstream Partners are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak technical and fundamental indicators, Western Midstream may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Merck and Western Midstream

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

The idea behind Merck Company and Western Midstream Partners 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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.