Correlation Between Merck and Exxon

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Can any of the company-specific risk be diversified away by investing in both Merck and Exxon 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 Exxon into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Merck Company and Exxon Mobil Corp, you can compare the effects of market volatilities on Merck and Exxon 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 Exxon. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Exxon.

Diversification Opportunities for Merck and Exxon

0.84
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Merck and Exxon is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Exxon Mobil Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Exxon Mobil 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 Exxon. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Exxon Mobil Corp has no effect on the direction of Merck i.e., Merck and Exxon go up and down completely randomly.

Pair Corralation between Merck and Exxon

Considering the 90-day investment horizon Merck is expected to generate 2.08 times less return on investment than Exxon. But when comparing it to its historical volatility, Merck Company is 1.78 times less risky than Exxon. It trades about 0.17 of its potential returns per unit of risk. Exxon Mobil Corp is currently generating about 0.19 of returns per unit of risk over similar time horizon. If you would invest  6,030  in Exxon Mobil Corp on February 27, 2022 and sell it today you would earn a total of  3,729  from holding Exxon Mobil Corp or generate 61.84% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

Merck Company  vs.  Exxon Mobil Corp

 Performance (%) 
      Timeline 
Merck Company 
Merck Performance
21 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. Despite fairly conflicting basic indicators, Merck demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Merck Price Channel

Exxon Mobil Corp 
Exxon Performance
11 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Exxon Mobil Corp are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady basic indicators, Exxon revealed solid returns over the last few months and may actually be approaching a breakup point.

Exxon Price Channel

Merck and Exxon Volatility Contrast

 Predicted Return Density 
      Returns 

Pair Trading with Merck and Exxon

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

Merck Company

Pair trading matchups for Merck

The idea behind Merck Company and Exxon Mobil 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.
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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.

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