Correlation Between Volkswagen and Merck

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

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

Diversification Opportunities for Volkswagen and Merck

0.5

Correlation Coefficient

Volkswagen  Merck

Very weak diversification

The 3 months correlation between Volkswagen and Merck is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding Volkswagen AG and Merck Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck and Volkswagen 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 Volkswagen 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 has no effect on the direction of Volkswagen i.e., Volkswagen and Merck go up and down completely randomly.

Pair Corralation between Volkswagen and Merck

Assuming the 90 days trading horizon Volkswagen AG is expected to under-perform the Merck. In addition to that, Volkswagen is 1.13 times more volatile than Merck Co. It trades about -0.07 of its total potential returns per unit of risk. Merck Co is currently generating about -0.02 per unit of volatility. If you would invest  9,798  in Merck Co on October 8, 2024 and sell it today you would lose (148.00) from holding Merck Co or give up 1.51% of portfolio value over 90 days.

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

Volkswagen AG  vs.  Merck Co

Volkswagen AG

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Volkswagen AG has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Volkswagen is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Merck

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Merck Co has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy forward-looking signals, Merck is not utilizing all of its potentials. The newest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Volkswagen and Merck

The main advantage of trading using opposite Volkswagen and Merck positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Volkswagen 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 Volkswagen AG and Merck Co 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.