Correlation Between Microsoft and Merck

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

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

Diversification Opportunities for Microsoft and Merck

0.73

Correlation Coefficient

Microsoft  Merck

Poor diversification

The 3 months correlation between Microsoft and Merck is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft and Merck Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck Company and Microsoft 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 Microsoft are associated (or correlated) with Merck. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Merck Company has no effect on the direction of Microsoft i.e., Microsoft and Merck go up and down completely randomly.

Pair Corralation between Microsoft and Merck

Assuming the 90 days trading horizon Microsoft is expected to under-perform the Merck. In addition to that, Microsoft is 1.26 times more volatile than Merck Company. It trades about -0.13 of its total potential returns per unit of risk. Merck Company is currently generating about -0.07 per unit of volatility. If you would invest  13,935  in Merck Company on December 30, 2024 and sell it today you would lose (935.00) from holding Merck Company or give up 6.71% of portfolio value over 90 days.

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

Microsoft  vs.  Merck Company

Microsoft

Risk-Adjusted Performance

Very Weak

Over the last 90 days Microsoft has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fragile performance in the last few months, the Stock's technical and fundamental indicators remain rather sound which may send shares a bit higher in April 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Merck Company

Risk-Adjusted Performance

Very Weak

Over the last 90 days Merck Company has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound forward-looking signals, Merck is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Microsoft and Merck

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

The idea behind Microsoft and Merck Company 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.