Correlation Between Merck and Eli Lilly
Can any of the company-specific risk be diversified away by investing in both Merck and Eli Lilly 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 Eli Lilly into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Merck Company and Eli Lilly and, you can compare the effects of market volatilities on Merck and Eli Lilly 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 Eli Lilly. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Eli Lilly.
Diversification Opportunities for Merck and Eli Lilly
Poor diversification
The 3 months correlation between Merck and Eli is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Eli Lilly and in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Eli Lilly 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 Eli Lilly. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Eli Lilly has no effect on the direction of Merck i.e., Merck and Eli Lilly go up and down completely randomly.
Pair Corralation between Merck and Eli Lilly
Considering the 90-day investment horizon Merck is expected to generate 4.96 times less return on investment than Eli Lilly. But when comparing it to its historical volatility, Merck Company is 1.72 times less risky than Eli Lilly. It trades about 0.05 of its potential returns per unit of risk. Eli Lilly and is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest 40,244 in Eli Lilly and on January 26, 2024 and sell it today you would earn a total of 32,976 from holding Eli Lilly and or generate 81.94% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Merck Company vs. Eli Lilly and
Performance |
| Timeline |
| Merck Company |
| Eli Lilly |
Merck and Eli Lilly Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Merck and Eli Lilly
The main advantage of trading using opposite Merck and Eli Lilly positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Eli Lilly 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 Eli Lilly will offset losses from the drop in Eli Lilly's long position.The idea behind Merck Company and Eli Lilly and 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.| Eli Lilly vs. Johnson Johnson | Eli Lilly vs. Bristol Myers Squibb | Eli Lilly vs. AbbVie Inc | Eli Lilly vs. Pfizer Inc |
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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.
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