Correlation Between Merck and Coca Cola

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

Diversification Opportunities for Merck and Coca Cola

0.66
  Correlation Coefficient

Poor diversification

The 3 months correlation between Merck and Coca is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and The Coca-Cola in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Coca-Cola 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 Coca Cola. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Coca-Cola has no effect on the direction of Merck i.e., Merck and Coca Cola go up and down completely randomly.

Pair Corralation between Merck and Coca Cola

Considering the 90-day investment horizon Merck Company is expected to generate 2.3 times more return on investment than Coca Cola. However, Merck is 2.3 times more volatile than The Coca Cola. It trades about 0.1 of its potential returns per unit of risk. The Coca Cola is currently generating about 0.17 per unit of risk. If you would invest  12,822  in Merck Company on December 29, 2023 and sell it today you would earn a total of  373.00  from holding Merck Company or generate 2.91% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Merck Company  vs.  The Coca-Cola

 Performance 
       Timeline  
Merck Company 

Risk-Adjusted Performance

21 of 100

 
Low
 
High
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. Despite quite conflicting basic indicators, Merck disclosed solid returns over the last few months and may actually be approaching a breakup point.
Coca-Cola 

Risk-Adjusted Performance

7 of 100

 
Low
 
High
OK
Compared to the overall equity markets, risk-adjusted returns on investments in The Coca Cola are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Coca Cola is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Merck and Coca Cola Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Merck and Coca Cola

The main advantage of trading using opposite Merck and Coca Cola positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Coca Cola 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 Coca Cola will offset losses from the drop in Coca Cola's long position.
The idea behind Merck Company and The Coca Cola 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.

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