Can any of the company-specific risk be diversified away by investing in both Merck and ProShares Hedge 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 ProShares Hedge into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Merck Company and ProShares Hedge Replication, you can compare the effects of market volatilities on Merck and ProShares Hedge 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 ProShares Hedge. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and ProShares Hedge.
Diversification Opportunities for Merck and ProShares Hedge
The 3 months correlation between Merck and ProShares is 0.29. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and ProShares Hedge Replication in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ProShares Hedge Repl 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 ProShares Hedge. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ProShares Hedge Repl has no effect on the direction of Merck i.e., Merck and ProShares Hedge go up and down completely randomly.
Pair Corralation between Merck and ProShares Hedge
Considering the 90-day investment horizon Merck is expected to generate 1.12 times less return on investment than ProShares Hedge. In addition to that, Merck is 2.93 times more volatile than ProShares Hedge Replication. It trades about 0.07 of its total potential returns per unit of risk. ProShares Hedge Replication is currently generating about 0.21 per unit of volatility. If you would invest 4,743 in ProShares Hedge Replication on September 7, 2023 and sell it today you would earn a total of 70.00 from holding ProShares Hedge Replication or generate 1.48% 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 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.
Compared to the overall equity markets, risk-adjusted returns on investments in ProShares Hedge Replication are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable fundamental indicators, ProShares Hedge is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.
The main advantage of trading using opposite Merck and ProShares Hedge positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, ProShares Hedge 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 ProShares Hedge will offset losses from the drop in ProShares Hedge's long position.
The idea behind Merck Company and ProShares Hedge Replication 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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.
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