Correlation Between CochLear and Merck KGaA

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

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

Diversification Opportunities for CochLear and Merck KGaA

0.62

Correlation Coefficient

CochLear  Merck KGaA

Poor diversification

The 3 months correlation between CochLear and Merck is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding CochLear Ltd ADR and Merck KGaA ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck KGaA ADR and CochLear 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 CochLear Ltd ADR are associated (or correlated) with Merck KGaA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Merck KGaA ADR has no effect on the direction of CochLear i.e., CochLear and Merck KGaA go up and down completely randomly.

Pair Corralation between CochLear and Merck KGaA

Assuming the 90 days horizon CochLear Ltd ADR is expected to generate 0.86 times more return on investment than Merck KGaA. However, CochLear Ltd ADR is 1.16 times less risky than Merck KGaA. It trades about 0.09 of its potential returns per unit of risk. Merck KGaA ADR is currently generating about 0.04 per unit of risk. If you would invest  8,980  in CochLear Ltd ADR on February 29, 2024 and sell it today you would earn a total of  1,600  from holding CochLear Ltd ADR or generate 17.82% return on investment over 90 days.

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

CochLear Ltd ADR  vs.  Merck KGaA ADR

CochLear ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days CochLear Ltd ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, CochLear is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Merck KGaA ADR

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Merck KGaA ADR are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile technical and fundamental indicators, Merck KGaA may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with CochLear and Merck KGaA

The main advantage of trading using opposite CochLear and Merck KGaA positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if CochLear position performs unexpectedly, Merck KGaA 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 KGaA will offset losses from the drop in Merck KGaA's long position.

The idea behind CochLear Ltd ADR and Merck KGaA ADR 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 Sync Your Broker module to sync your existing holdings, watchlists, positions or portfolios from thousands of online brokerage services, banks, investment account aggregators and robo-advisors..