Correlation Between Merck and Colgate Palmolive

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

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

Diversification Opportunities for Merck and Colgate Palmolive

0.61

Correlation Coefficient

Merck  Colgate Palmolive

Poor diversification

The 3 months correlation between Merck and Colgate is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Colgate Palmolive in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Colgate Palmolive 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 Colgate Palmolive. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Colgate Palmolive has no effect on the direction of Merck i.e., Merck and Colgate Palmolive go up and down completely randomly.

Pair Corralation between Merck and Colgate Palmolive

Considering the 90-day investment horizon Merck Company is expected to generate 2.01 times more return on investment than Colgate Palmolive. However, Merck is 2.01 times more volatile than Colgate Palmolive. It trades about 0.12 of its potential returns per unit of risk. Colgate Palmolive is currently generating about -0.18 per unit of risk. If you would invest  12,144  in Merck Company on January 18, 2024 and sell it today you would earn a total of  393.00  from holding Merck Company or generate 3.24% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.45%
Values	Daily Returns

Merck Company  vs.  Colgate Palmolive

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 weak basic indicators, Merck may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Colgate Palmolive

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Colgate Palmolive are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite quite conflicting essential indicators, Colgate Palmolive may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Pair Trading with Merck and Colgate Palmolive

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

The idea behind Merck Company and Colgate Palmolive 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.