Correlation Between Merck and ProShares UltraShort

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

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

Diversification Opportunities for Merck and ProShares UltraShort

-0.31

Correlation Coefficient

Merck  ProShares UltraShort

Very good diversification

The 3 months correlation between Merck and ProShares is -0.31. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and ProShares UltraShort Utilities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ProShares UltraShort 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 ProShares UltraShort. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ProShares UltraShort has no effect on the direction of Merck i.e., Merck and ProShares UltraShort go up and down completely randomly.

Pair Corralation between Merck and ProShares UltraShort

Considering the 90-day investment horizon Merck is expected to generate 1.01 times less return on investment than ProShares UltraShort. But when comparing it to its historical volatility, Merck Company is 2.03 times less risky than ProShares UltraShort. It trades about 0.08 of its potential returns per unit of risk. ProShares UltraShort Utilities is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  1,088  in ProShares UltraShort Utilities on January 17, 2024 and sell it today you would earn a total of  141.00  from holding ProShares UltraShort Utilities or generate 12.96% return on investment over 90 days.

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

Merck Company  vs.  ProShares UltraShort Utilities

Merck Company

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 8 (%) 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.

ProShares UltraShort

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days ProShares UltraShort Utilities has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable fundamental indicators, ProShares UltraShort is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Merck and ProShares UltraShort

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

The idea behind Merck Company and ProShares UltraShort Utilities 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 Anywhere module to track or share privately all of your investments from the convenience of any device.