Correlation Between Merck and Universal Health

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

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

Diversification Opportunities for Merck and Universal Health

0.35

Correlation Coefficient

Merck  Universal Health

Weak diversification

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

Pair Corralation between Merck and Universal Health

Considering the 90-day investment horizon Merck Company is expected to generate 0.62 times more return on investment than Universal Health. However, Merck Company is 1.6 times less risky than Universal Health. It trades about 0.08 of its potential returns per unit of risk. Universal Health Services is currently generating about 0.04 per unit of risk. If you would invest  8,282  in Merck Company on January 21, 2024 and sell it today you would earn a total of  4,296  from holding Merck Company or generate 51.87% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	99.8%
Values	Daily Returns

Merck Company  vs.  Universal Health Services

Merck Company

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 7 (%) 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.

Universal Health Services

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Universal Health Services are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable technical indicators, Universal Health is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Merck and Universal Health

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

The idea behind Merck Company and Universal Health Services 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 Cryptocurrency Center module to build and monitor diversified portfolio of extremely risky digital assets and cryptocurrency.