Correlation Between Westinghouse Air and Merck

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

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

Diversification Opportunities for Westinghouse Air and Merck

0.07

Correlation Coefficient

Westinghouse Air  Merck

Significant diversification

The 3 months correlation between Westinghouse and Merck is 0.07. Overlapping area represents the amount of risk that can be diversified away by holding Westinghouse Air Brake and Merck Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck and Westinghouse Air 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 Westinghouse Air Brake 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 Westinghouse Air i.e., Westinghouse Air and Merck go up and down completely randomly.

Pair Corralation between Westinghouse Air and Merck

Assuming the 90 days trading horizon Westinghouse Air Brake is expected to under-perform the Merck. But the stock apears to be less risky and, when comparing its historical volatility, Westinghouse Air Brake is 2.62 times less risky than Merck. The stock trades about -0.17 of its potential returns per unit of risk. The Merck Co is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  7,756  in Merck Co on October 6, 2024 and sell it today you would lose (41.00) from holding Merck Co or give up 0.53% of portfolio value over 90 days.

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

Westinghouse Air Brake  vs.  Merck Co

Westinghouse Air Brake

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Westinghouse Air Brake are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Westinghouse Air sustained solid returns over the last few months and may actually be approaching a breakup point.

Merck

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Merck Co are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong fundamental indicators, 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 Westinghouse Air and Merck

The main advantage of trading using opposite Westinghouse Air and Merck positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Westinghouse Air 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 Westinghouse Air Brake 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.

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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 Stock Tickers module to use high-impact, comprehensive, and customizable stock tickers that can be easily integrated to any websites.