Correlation Between Merck and New Oriental

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

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

Diversification Opportunities for Merck and New Oriental

0.46

Correlation Coefficient

Merck  New Oriental

Very weak diversification

The 3 months correlation between Merck and New is 0.46. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and New Oriental Education in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on New Oriental Education 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 New Oriental. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of New Oriental Education has no effect on the direction of Merck i.e., Merck and New Oriental go up and down completely randomly.

Pair Corralation between Merck and New Oriental

Considering the 90-day investment horizon Merck is expected to generate 6.71 times less return on investment than New Oriental. But when comparing it to its historical volatility, Merck Company is 2.47 times less risky than New Oriental. It trades about 0.05 of its potential returns per unit of risk. New Oriental Education is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  3,740  in New Oriental Education on January 19, 2024 and sell it today you would earn a total of  4,949  from holding New Oriental Education or generate 132.33% return on investment over 90 days.

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

Merck Company  vs.  New Oriental Education

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.

New Oriental Education

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in New Oriental Education are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain fundamental indicators, New Oriental unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck and New Oriental

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

The idea behind Merck Company and New Oriental Education 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.