Correlation Between Chevron Corp and Merck

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

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

Diversification Opportunities for Chevron Corp and Merck

0.75

Correlation Coefficient

Chevron Corp  Merck

Poor diversification

The 3 months correlation between Chevron and Merck is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Chevron Corp and Merck Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck Company and Chevron Corp 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 Chevron Corp 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 Chevron Corp i.e., Chevron Corp and Merck go up and down completely randomly.

Pair Corralation between Chevron Corp and Merck

Considering the 90-day investment horizon Chevron Corp is expected to generate 2.92 times less return on investment than Merck. In addition to that, Chevron Corp is 1.4 times more volatile than Merck Company. It trades about 0.02 of its total potential returns per unit of risk. Merck Company is currently generating about 0.07 per unit of volatility. If you would invest  8,380  in Merck Company on January 19, 2024 and sell it today you would earn a total of  4,143  from holding Merck Company or generate 49.44% return on investment over 90 days.

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

Chevron Corp  vs.  Merck Company

Chevron Corp

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Chevron Corp are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Chevron Corp may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Merck Company

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent basic indicators, Merck is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with Chevron Corp and Merck

The main advantage of trading using opposite Chevron Corp and Merck positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Chevron Corp 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 Chevron Corp 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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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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.