Correlation Between Charles Schwab and Merck

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

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

Diversification Opportunities for Charles Schwab and Merck

0.42

Correlation Coefficient

Charles Schwab  Merck

Very weak diversification

The 3 months correlation between Charles and Merck is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding Charles Schwab Corp and Merck Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck Company and Charles Schwab 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 Charles Schwab 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 Charles Schwab i.e., Charles Schwab and Merck go up and down completely randomly.

Pair Corralation between Charles Schwab and Merck

Given the investment horizon of 90 days Charles Schwab Corp is expected to generate 0.85 times more return on investment than Merck. However, Charles Schwab Corp is 1.18 times less risky than Merck. It trades about 0.24 of its potential returns per unit of risk. Merck Company is currently generating about 0.05 per unit of risk. If you would invest  7,133  in Charles Schwab Corp on January 25, 2024 and sell it today you would earn a total of  390.00  from holding Charles Schwab Corp or generate 5.47% return on investment over 90 days.

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

Charles Schwab Corp  vs.  Merck Company

Charles Schwab Corp

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Charles Schwab Corp are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unfluctuating technical indicators, Charles Schwab showed solid returns over the last few months and may actually be approaching a breakup point.

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 unsteady basic indicators, Merck may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Pair Trading with Charles Schwab and Merck

The main advantage of trading using opposite Charles Schwab and Merck positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Charles Schwab 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 Charles Schwab 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.

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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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.