Correlation Between B of A and Merck

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

Diversification Opportunities for B of A and Merck

-0.1
  Correlation Coefficient

Good diversification

The 3 months correlation between B of A and Merck is -0.1. Overlapping area represents the amount of risk that can be diversified away by holding Bank Of America and Merck Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck Company and B of A 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 Bank Of America 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 B of A i.e., B of A and Merck go up and down completely randomly.

Pair Corralation between B of A and Merck

Considering the 90-day investment horizon Bank Of America is expected to under-perform the Merck. In addition to that, B of A is 1.23 times more volatile than Merck Company. It trades about -0.01 of its total potential returns per unit of risk. Merck Company is currently generating about 0.06 per unit of volatility. If you would invest  7,509  in Merck Company on May 15, 2022 and sell it today you would earn a total of  1,593  from holding Merck Company or generate 21.21% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthInsignificant
Accuracy100.0%
ValuesDaily Returns

Bank Of America  vs.  Merck Company

 Performance (%) 
       Timeline  
Bank Of America 
B of A Performance
3 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Bank Of America are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, B of A is not utilizing all of its potentials. The new stock price disturbance, may contribute to short-term losses for the investors.

B of A Price Channel

Merck Company 
Merck Performance
0 of 100
Over the last 90 days Merck Company has generated negative risk-adjusted returns adding no value to investors with long positions. 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

B of A and Merck Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with B of A and Merck

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

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