Correlation Between Abbott Laboratories and Merck

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Can any of the company-specific risk be diversified away by investing in both Abbott Laboratories 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 Abbott Laboratories and Merck into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Abbott Laboratories and Merck Company, you can compare the effects of market volatilities on Abbott Laboratories 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 Abbott Laboratories with a short position of Merck. Check out your portfolio center. Please also check ongoing floating volatility patterns of Abbott Laboratories and Merck.

Diversification Opportunities for Abbott Laboratories and Merck

0.82
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Abbott and Merck is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Abbott Laboratories and Merck Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck Company and Abbott Laboratories 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 Abbott Laboratories 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 Abbott Laboratories i.e., Abbott Laboratories and Merck go up and down completely randomly.

Pair Corralation between Abbott Laboratories and Merck

Considering the 90-day investment horizon Abbott Laboratories is expected to generate 0.72 times more return on investment than Merck. However, Abbott Laboratories is 1.4 times less risky than Merck. It trades about 0.13 of its potential returns per unit of risk. Merck Company is currently generating about -0.21 per unit of risk. If you would invest  10,909  in Abbott Laboratories on November 4, 2022 and sell it today you would earn a total of  316.00  from holding Abbott Laboratories or generate 2.9% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy95.45%
ValuesDaily Returns

Abbott Laboratories  vs.  Merck Company

 Performance (%) 
       Timeline  
Abbott Laboratories 
Abbott Performance
13 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Abbott Laboratories are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile fundamental drivers, Abbott Laboratories unveiled solid returns over the last few months and may actually be approaching a breakup point.

Abbott Price Channel

Merck Company 
Merck Performance
5 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong basic indicators, Merck is not utilizing all of its potentials. The new stock price confusion, may contribute to short-horizon losses for the traders.

Merck Price Channel

Abbott Laboratories and Merck Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Abbott Laboratories and Merck

The main advantage of trading using opposite Abbott Laboratories and Merck positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Abbott Laboratories 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.
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The idea behind Abbott Laboratories 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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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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.

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