Correlation Between Merck and First Trust

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

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

Diversification Opportunities for Merck and First Trust

-0.84

Correlation Coefficient

Merck  First Trust

Pay attention - limited upside

The 3 months correlation between Merck and First is -0.84. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and First Trust Expanded in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust Expanded 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 First Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Trust Expanded has no effect on the direction of Merck i.e., Merck and First Trust go up and down completely randomly.

Pair Corralation between Merck and First Trust

Considering the 90-day investment horizon Merck Company is expected to under-perform the First Trust. In addition to that, Merck is 1.14 times more volatile than First Trust Expanded. It trades about -0.17 of its total potential returns per unit of risk. First Trust Expanded is currently generating about 0.18 per unit of volatility. If you would invest  2,716  in First Trust Expanded on September 4, 2024 and sell it today you would earn a total of  334.00  from holding First Trust Expanded or generate 12.3% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Significant
Accuracy	98.44%
Values	Daily Returns

Merck Company  vs.  First Trust Expanded

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.

First Trust Expanded

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Expanded are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak basic indicators, First Trust may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Merck and First Trust

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

The idea behind Merck Company and First Trust Expanded 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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.