Correlation Between Merck and Amazon

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

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

Diversification Opportunities for Merck and Amazon

0.7

Correlation Coefficient

Merck  Amazon

Poor diversification

The 3 months correlation between Merck and Amazon is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Amazon Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Amazon Inc and Merck 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 Merck Company are associated (or correlated) with Amazon. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Amazon Inc has no effect on the direction of Merck i.e., Merck and Amazon go up and down completely randomly.

Pair Corralation between Merck and Amazon

Considering the 90-day investment horizon Merck is expected to generate 1.3 times less return on investment than Amazon. In addition to that, Merck is 1.24 times more volatile than Amazon Inc. It trades about 0.1 of its total potential returns per unit of risk. Amazon Inc is currently generating about 0.16 per unit of volatility. If you would invest  17,590  in Amazon Inc on January 19, 2024 and sell it today you would earn a total of  613.00  from holding Amazon Inc or generate 3.48% return on investment over 90 days.

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

Merck Company  vs.  Amazon Inc

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.

Amazon Inc

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Amazon Inc are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of very unsteady basic indicators, Amazon displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck and Amazon

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

The idea behind Merck Company and Amazon Inc 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.