Correlation Between Roche Holding and Merck

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

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

Diversification Opportunities for Roche Holding and Merck

-0.61

Correlation Coefficient

Roche Holding  Merck

Excellent diversification

The 3 months correlation between Roche and Merck is -0.61. Overlapping area represents the amount of risk that can be diversified away by holding Roche Holding AG and Merck Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck Company and Roche Holding 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 Roche Holding AG 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 Roche Holding i.e., Roche Holding and Merck go up and down completely randomly.

Pair Corralation between Roche Holding and Merck

Assuming the 90 days trading horizon Roche Holding AG is expected to generate 0.88 times more return on investment than Merck. However, Roche Holding AG is 1.14 times less risky than Merck. It trades about 0.22 of its potential returns per unit of risk. Merck Company is currently generating about -0.02 per unit of risk. If you would invest  552,326  in Roche Holding AG on December 23, 2024 and sell it today you would earn a total of  141,812  from holding Roche Holding AG or generate 25.68% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	98.39%
Values	Daily Returns

Roche Holding AG  vs.  Merck Company

Roche Holding AG

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Roche Holding AG are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Roche Holding showed solid returns over the last few months and may actually be approaching a breakup point.

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 fairly strong forward-looking signals, Merck is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Roche Holding and Merck

The main advantage of trading using opposite Roche Holding and Merck positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Roche Holding 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 Roche Holding AG 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.