Correlation Between Merck and Strategic Allocation

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

Diversification Opportunities for Merck and Strategic Allocation

0.67
  Correlation Coefficient

Poor diversification

The 3 months correlation between Merck and Strategic is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and STRATEGIC ALLOCATION MODERATE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Strategic Allocation 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 Strategic Allocation. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Strategic Allocation has no effect on the direction of Merck i.e., Merck and Strategic Allocation go up and down completely randomly.

Pair Corralation between Merck and Strategic Allocation

Considering the 90-day investment horizon Merck Company is expected to under-perform the Strategic Allocation. In addition to that, Merck is 1.82 times more volatile than Strategic Allocation Moderate. It trades about -0.27 of its total potential returns per unit of risk. Strategic Allocation Moderate is currently generating about 0.26 per unit of volatility. If you would invest  619.00  in Strategic Allocation Moderate on December 19, 2023 and sell it today you would earn a total of  13.00  from holding Strategic Allocation Moderate or generate 2.1% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy95.24%
ValuesDaily Returns

Merck Company  vs.  STRATEGIC ALLOCATION MODERATE

 Performance 
       Timeline  
Merck Company 

Risk-Adjusted Performance

17 of 100

 
Low
 
High
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite quite weak basic indicators, Merck disclosed solid returns over the last few months and may actually be approaching a breakup point.
Strategic Allocation 

Risk-Adjusted Performance

10 of 100

 
Low
 
High
OK
Compared to the overall equity markets, risk-adjusted returns on investments in Strategic Allocation Moderate are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Strategic Allocation is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Merck and Strategic Allocation Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Merck and Strategic Allocation

The main advantage of trading using opposite Merck and Strategic Allocation positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Strategic Allocation 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 Strategic Allocation will offset losses from the drop in Strategic Allocation's long position.
The idea behind Merck Company and Strategic Allocation Moderate 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.

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