Correlation Between Merck and Microsoft Corp

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Can any of the company-specific risk be diversified away by investing in both Merck and Microsoft Corp 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 Corp 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 Corp, you can compare the effects of market volatilities on Merck and Microsoft Corp 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 Corp. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Microsoft Corp.

Diversification Opportunities for Merck and Microsoft Corp

0.35
  Correlation Coefficient

Weak diversification

The 3 months correlation between Merck and Microsoft is 0.35. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Microsoft Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microsoft Corp 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 Corp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Microsoft Corp has no effect on the direction of Merck i.e., Merck and Microsoft Corp go up and down completely randomly.

Pair Corralation between Merck and Microsoft Corp

Considering the 90-day investment horizon Merck Company is expected to generate 0.65 times more return on investment than Microsoft Corp. However, Merck Company is 1.53 times less risky than Microsoft Corp. It trades about 0.06 of its potential returns per unit of risk. Microsoft Corp is currently generating about -0.12 per unit of risk. If you would invest  8,642  in Merck Company on July 6, 2022 and sell it today you would earn a total of  113.00  from holding Merck Company or generate 1.31% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Weak
Accuracy100.0%
ValuesDaily Returns

Merck Company  vs.  Microsoft Corp

 Performance (%) 
       Timeline  
Merck Company 
Merck Performance
0 of 100
Over the last 90 days Merck Company has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong basic indicators, Merck is not utilizing all of its potentials. The latest stock price confusion, may contribute to short-horizon losses for the traders.

Merck Price Channel

Microsoft Corp 
Microsoft Performance
0 of 100
Over the last 90 days Microsoft Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest conflicting performance, the Stock's technical and fundamental indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Microsoft Price Channel

Merck and Microsoft Corp Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Merck and Microsoft Corp

The main advantage of trading using opposite Merck and Microsoft Corp positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Microsoft Corp 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 Corp will offset losses from the drop in Microsoft Corp's long position.
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The idea behind Merck Company and Microsoft Corp 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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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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.

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