Correlation Between Home Depot and Merck

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

Diversification Opportunities for Home Depot and Merck

0.84
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Home and Merck is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and Merck Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck Company and Home Depot 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 Home Depot 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 Home Depot i.e., Home Depot and Merck go up and down completely randomly.

Pair Corralation between Home Depot and Merck

Allowing for the 90-day total investment horizon Home Depot is expected to generate 2.31 times less return on investment than Merck. In addition to that, Home Depot is 1.3 times more volatile than Merck Company. It trades about 0.03 of its total potential returns per unit of risk. Merck Company is currently generating about 0.09 per unit of volatility. If you would invest  7,789  in Merck Company on November 30, 2023 and sell it today you would earn a total of  5,114  from holding Merck Company or generate 65.66% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy99.8%
ValuesDaily Returns

Home Depot  vs.  Merck Company

 Performance 
       Timeline  
Home Depot 

Risk-Adjusted Performance

22 of 100

 
Low
 
High
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Home Depot are ranked lower than 22 (%) of all global equities and portfolios over the last 90 days. In spite of rather unfluctuating fundamental indicators, Home Depot exhibited solid returns over the last few months and may actually be approaching a breakup point.
Merck Company 

Risk-Adjusted Performance

28 of 100

 
Low
 
High
Strong
Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 28 (%) of all global equities and portfolios over the last 90 days. Despite quite unsteady basic indicators, Merck disclosed solid returns over the last few months and may actually be approaching a breakup point.

Home Depot and Merck Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Home Depot and Merck

The main advantage of trading using opposite Home Depot and Merck positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Home Depot 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 Home Depot 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 the Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.

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