Correlation Between Merck and McDonalds

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

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

Diversification Opportunities for Merck and McDonalds

-0.36

Correlation Coefficient

Merck  McDonalds

Very good diversification

The 3 months correlation between Merck and McDonalds is -0.36. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and McDonalds in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on McDonalds 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 McDonalds. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of McDonalds has no effect on the direction of Merck i.e., Merck and McDonalds go up and down completely randomly.

Pair Corralation between Merck and McDonalds

Considering the 90-day investment horizon Merck Company is expected to generate 1.09 times more return on investment than McDonalds. However, Merck is 1.09 times more volatile than McDonalds. It trades about -0.04 of its potential returns per unit of risk. McDonalds is currently generating about -0.13 per unit of risk. If you would invest  13,175  in Merck Company on January 27, 2024 and sell it today you would lose (103.00) from holding Merck Company or give up 0.78% of portfolio value over 90 days.

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

Merck Company  vs.  McDonalds

Merck Company

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite quite inconsistent basic indicators, Merck may actually be approaching a critical reversion point that can send shares even higher in May 2024.

McDonalds

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Merck and McDonalds

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

The idea behind Merck Company and McDonalds 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 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.