Correlation Between Microsoft Corp and Merck

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

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

Diversification Opportunities for Microsoft Corp and Merck

0.08
  Correlation Coefficient
Microsoft Corp
Merck Company

Significant diversification

The 3 months correlation between Microsoft and Merck is 0.08. Overlapping area represents the amount of risk that can be diversified away by holding Microsoft Corp and Merck Company in the same portfolio assuming nothing else is changed. The correlation between historical prices or returns on Merck Company and Microsoft Corp 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 Microsoft Corp are associated (or correlated) with Merck. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Merck Company has no effect on the direction of Microsoft Corp i.e., Microsoft Corp and Merck go up and down completely randomly.

Pair Corralation between Microsoft Corp and Merck

Given the investment horizon of 90 days Microsoft Corp is expected to generate 2.37 times less return on investment than Merck. But when comparing it to its historical volatility, Microsoft Corp is 1.61 times less risky than Merck. It trades about 0.16 of its potential returns per unit of risk. Merck Company is currently generating about 0.24 of returns per unit of risk over similar time horizon. If you would invest  7,336  in Merck Company on July 28, 2021 and sell it today you would earn a total of  847.00  from holding Merck Company or generate 11.55% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthInsignificant
Accuracy100.0%
ValuesDaily Returns

Microsoft Corp  vs.  Merck Company

 Performance (%) 
      Timeline 
Microsoft Corp 
 Microsoft Performance
8 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Microsoft Corp are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak technical and fundamental indicators, Microsoft Corp may actually be approaching a critical reversion point that can send shares even higher in November 2021.

Microsoft Price Channel

Merck Company 
 Merck Performance
3 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong basic indicators, Merck is not utilizing all of its potentials. The current stock price confusion, may contribute to short-horizon losses for the traders.

Merck Price Channel

Microsoft Corp and Merck Volatility Contrast

 Predicted Return Density 
      Returns 

Pair Trading with Microsoft Corp and Merck

The main advantage of trading using opposite Microsoft Corp and Merck positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Microsoft Corp position performs unexpectedly, Merck 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 Merck will offset losses from the drop in Merck's long position.
The idea behind Microsoft Corp and Merck Company 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.

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