Can any of the company-specific risk be diversified away by investing in both Merck and Listed Funds 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 Listed Funds into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Merck Company and Listed Funds Trust, you can compare the effects of market volatilities on Merck and Listed Funds 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 Listed Funds. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Listed Funds.
Diversification Opportunities for Merck and Listed Funds
The 3 months correlation between Merck and Listed is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Listed Funds Trust in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Listed Funds Trust 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 Listed Funds. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Listed Funds Trust has no effect on the direction of Merck i.e., Merck and Listed Funds go up and down completely randomly.
Considering the 90-day investment horizon Merck Company is expected to under-perform the Listed Funds. In addition to that, Merck is 1.24 times more volatile than Listed Funds Trust. It trades about -0.03 of its total potential returns per unit of risk. Listed Funds Trust is currently generating about 0.11 per unit of volatility. If you would invest 2,611 in Listed Funds Trust on September 1, 2023 and sell it today you would earn a total of 97.00 from holding Listed Funds Trust or generate 3.72% return on investment over 90 days.
Over the last 90 days Merck Company has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest unsteady 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.
Over the last 90 days Listed Funds Trust has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Listed Funds is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
The main advantage of trading using opposite Merck and Listed Funds positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Listed Funds 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 Listed Funds will offset losses from the drop in Listed Funds' long position.
The idea behind Merck Company and Listed Funds Trust 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 Global Correlations module to find global opportunities by holding instruments from different markets.
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