Correlation Between Merck and Darden Restaurants

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

Diversification Opportunities for Merck and Darden Restaurants

0.28
  Correlation Coefficient

Modest diversification

The 3 months correlation between Merck and Darden is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Darden Restaurants in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Darden Restaurants 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 Darden Restaurants. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Darden Restaurants has no effect on the direction of Merck i.e., Merck and Darden Restaurants go up and down completely randomly.

Pair Corralation between Merck and Darden Restaurants

Considering the 90-day investment horizon Merck Company is expected to under-perform the Darden Restaurants. In addition to that, Merck is 1.11 times more volatile than Darden Restaurants. It trades about -0.16 of its total potential returns per unit of risk. Darden Restaurants is currently generating about 0.24 per unit of volatility. If you would invest  13,881  in Darden Restaurants on November 2, 2022 and sell it today you would earn a total of  764.00  from holding Darden Restaurants or generate 5.5% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Weak
Accuracy100.0%
ValuesDaily Returns

Merck Company  vs.  Darden Restaurants

 Performance (%) 
       Timeline  
Merck Company 
Merck Performance
8 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite fairly unsteady basic indicators, Merck may actually be approaching a critical reversion point that can send shares even higher in March 2023.

Merck Price Channel

Darden Restaurants 
Darden Performance
6 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Darden Restaurants are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, Darden Restaurants may actually be approaching a critical reversion point that can send shares even higher in March 2023.

Darden Price Channel

Merck and Darden Restaurants Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Merck and Darden Restaurants

The main advantage of trading using opposite Merck and Darden Restaurants positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Darden Restaurants 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 Darden Restaurants will offset losses from the drop in Darden Restaurants' long position.
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The idea behind Merck Company and Darden Restaurants 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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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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.

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