Correlation Between Dr Reddys and Merck KGaA

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

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

Diversification Opportunities for Dr Reddys and Merck KGaA

0.62

Correlation Coefficient

Dr Reddys  Merck KGaA

Poor diversification

The 3 months correlation between RDY and Merck is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding Dr Reddys Laboratories and Merck KGaA ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck KGaA ADR and Dr Reddys 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 Dr Reddys Laboratories are associated (or correlated) with Merck KGaA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Merck KGaA ADR has no effect on the direction of Dr Reddys i.e., Dr Reddys and Merck KGaA go up and down completely randomly.

Pair Corralation between Dr Reddys and Merck KGaA

Considering the 90-day investment horizon Dr Reddys Laboratories is expected to generate 0.64 times more return on investment than Merck KGaA. However, Dr Reddys Laboratories is 1.56 times less risky than Merck KGaA. It trades about 0.03 of its potential returns per unit of risk. Merck KGaA ADR is currently generating about -0.03 per unit of risk. If you would invest  6,881  in Dr Reddys Laboratories on January 24, 2024 and sell it today you would earn a total of  334.00  from holding Dr Reddys Laboratories or generate 4.85% return on investment over 90 days.

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

Dr Reddys Laboratories  vs.  Merck KGaA ADR

Dr Reddys Laboratories

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Dr Reddys Laboratories are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong fundamental indicators, Dr Reddys is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Merck KGaA ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Merck KGaA ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong technical and fundamental indicators, Merck KGaA is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Dr Reddys and Merck KGaA

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

The idea behind Dr Reddys Laboratories and Merck KGaA ADR 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .