Correlation Between CarMax and Merck

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

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

Diversification Opportunities for CarMax and Merck

-0.34

Correlation Coefficient

CarMax  Merck

Very good diversification

The 3 months correlation between CarMax and Merck is -0.34. Overlapping area represents the amount of risk that can be diversified away by holding CarMax Inc and Merck Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck Company and CarMax 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 CarMax Inc 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 CarMax i.e., CarMax and Merck go up and down completely randomly.

Pair Corralation between CarMax and Merck

Considering the 90-day investment horizon CarMax Inc is expected to under-perform the Merck. In addition to that, CarMax is 1.85 times more volatile than Merck Company. It trades about -0.17 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  11,578  in Merck Company on June 23, 2024 and sell it today you would earn a total of  139.00  from holding Merck Company or generate 1.2% return on investment over 90 days.

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

CarMax Inc  vs.  Merck Company

CarMax Inc

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in CarMax Inc are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong primary indicators, CarMax is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Merck Company

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Merck Company has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain persistent and the latest mess on Wall Street may also be a sign of long-standing gains for the company institutional investors.

Pair Trading with CarMax and Merck

The main advantage of trading using opposite CarMax and Merck positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if CarMax 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 CarMax Inc 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.