Correlation Between Merck and Home Depot

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

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

Diversification Opportunities for Merck and Home Depot

0.16

Correlation Coefficient

Merck  Home Depot

Average diversification

The 3 months correlation between Merck and Home is 0.16. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Home Depot in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Home Depot 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 Home Depot. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Home Depot has no effect on the direction of Merck i.e., Merck and Home Depot go up and down completely randomly.

Pair Corralation between Merck and Home Depot

Considering the 90-day investment horizon Merck Company is expected to generate 0.83 times more return on investment than Home Depot. However, Merck Company is 1.21 times less risky than Home Depot. It trades about 0.16 of its potential returns per unit of risk. Home Depot is currently generating about 0.11 per unit of risk. If you would invest  10,196  in Merck Company on January 20, 2024 and sell it today you would earn a total of  2,327  from holding Merck Company or generate 22.82% return on investment over 90 days.

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

Merck Company  vs.  Home Depot

Merck Company

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 6 (%) 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 newest stock price mess, may contribute to short-term losses for the institutional investors.

Home Depot

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Home Depot has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, Home Depot is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Merck and Home Depot

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

The idea behind Merck Company and Home Depot 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.