Correlation Between Merck and NVIDIA

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

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

Diversification Opportunities for Merck and NVIDIA

0.36

Correlation Coefficient

Merck  NVIDIA

Weak diversification

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

Pair Corralation between Merck and NVIDIA

Considering the 90-day investment horizon Merck is expected to generate 12.1 times less return on investment than NVIDIA. But when comparing it to its historical volatility, Merck Company is 2.64 times less risky than NVIDIA. It trades about 0.03 of its potential returns per unit of risk. NVIDIA is currently generating about 0.15 of returns per unit of risk over similar time horizon. If you would invest  1,665  in NVIDIA on July 7, 2024 and sell it today you would earn a total of  10,827  from holding NVIDIA or generate 650.27% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

Merck Company  vs.  NVIDIA

Merck Company

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Merck Company has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest unsteady performance, the Stock's basic indicators remain persistent and the latest mess on Wall Street may also be a sign of long-standing gains for the company institutional investors.

NVIDIA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days NVIDIA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong fundamental indicators, NVIDIA is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Merck and NVIDIA

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

The idea behind Merck Company and NVIDIA 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.