Correlation Between Merck and IShares MSCI

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

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

Diversification Opportunities for Merck and IShares MSCI

0.39

Correlation Coefficient

Merck  IShares MSCI

Weak diversification

The 3 months correlation between Merck and IShares is 0.39. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and iShares MSCI EAFE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares MSCI EAFE 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 IShares MSCI. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares MSCI EAFE has no effect on the direction of Merck i.e., Merck and IShares MSCI go up and down completely randomly.

Pair Corralation between Merck and IShares MSCI

Considering the 90-day investment horizon Merck Company is expected to generate 1.76 times more return on investment than IShares MSCI. However, Merck is 1.76 times more volatile than iShares MSCI EAFE. It trades about 0.06 of its potential returns per unit of risk. iShares MSCI EAFE is currently generating about -0.28 per unit of risk. If you would invest  12,385  in Merck Company on January 20, 2024 and sell it today you would earn a total of  193.00  from holding Merck Company or generate 1.56% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.45%
Values	Daily Returns

Merck Company  vs.  iShares MSCI EAFE

Merck Company

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent basic indicators, Merck is not utilizing all of its potentials. The newest stock price mess, may contribute to short-term losses for the institutional investors.

iShares MSCI EAFE

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in iShares MSCI EAFE are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong fundamental indicators, IShares MSCI 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 IShares MSCI

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

The idea behind Merck Company and iShares MSCI EAFE 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.