Correlation Between Merck and Demant AS

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

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

Diversification Opportunities for Merck and Demant AS

0.88

Correlation Coefficient

Merck  Demant AS

Very poor diversification

The 3 months correlation between Merck and Demant is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Demant AS ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Demant AS ADR 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 Demant AS. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Demant AS ADR has no effect on the direction of Merck i.e., Merck and Demant AS go up and down completely randomly.

Pair Corralation between Merck and Demant AS

Considering the 90-day investment horizon Merck Company is expected to generate 0.61 times more return on investment than Demant AS. However, Merck Company is 1.64 times less risky than Demant AS. It trades about 0.01 of its potential returns per unit of risk. Demant AS ADR is currently generating about 0.0 per unit of risk. If you would invest  10,167  in Merck Company on September 4, 2024 and sell it today you would earn a total of  18.00  from holding Merck Company or generate 0.18% return on investment over 90 days.

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

Merck Company  vs.  Demant AS ADR

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 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.

Demant AS ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Demant AS ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak 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 Demant AS

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

The idea behind Merck Company and Demant AS ADR 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.