# Correlation Between Merck and Microsoft

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

## Diversification Opportunities for Merck and Microsoft

 0.63 Correlation Coefficient

### Poor diversification

The 3 months correlation between Merck and Microsoft is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Microsoft in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microsoft 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 Microsoft. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Microsoft has no effect on the direction of Merck i.e., Merck and Microsoft go up and down completely randomly.

## Pair Corralation between Merck and Microsoft

Considering the 90-day investment horizon Merck is expected to generate 1.1 times less return on investment than Microsoft. But when comparing it to its historical volatility, Merck Company is 1.48 times less risky than Microsoft. It trades about 0.08 of its potential returns per unit of risk. Microsoft is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  26,542  in Microsoft on January 16, 2024 and sell it today you would earn a total of  16,084  from holding Microsoft or generate 60.6% return on investment over 90 days.
 Time Period 3 Months [change] Direction Moves Together Strength Significant Accuracy 100.0% Values Daily Returns

## Merck Company  vs.  Microsoft

 Performance
 Timeline
 Merck Company Correlation Profile

### 9 of 100

 Weak Strong
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 weak basic indicators, Merck may actually be approaching a critical reversion point that can send shares even higher in May 2024.
 Performance Backtest Predict
 Microsoft Correlation Profile

### 9 of 100

 Weak Strong
OK
Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain technical and fundamental indicators, Microsoft may actually be approaching a critical reversion point that can send shares even higher in May 2024.
 Performance Backtest Predict

## Merck and Microsoft Volatility Contrast

 Predicted Return Density
 Returns

## Pair Trading with Merck and Microsoft

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