Correlation Between Vale SA and Merck

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

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

Diversification Opportunities for Vale SA and Merck

-0.45

Correlation Coefficient

Vale SA  Merck

Very good diversification

The 3 months correlation between Vale and Merck is -0.45. Overlapping area represents the amount of risk that can be diversified away by holding Vale SA ADR and Merck Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck Company and Vale SA 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 Vale SA ADR 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 Vale SA i.e., Vale SA and Merck go up and down completely randomly.

Pair Corralation between Vale SA and Merck

Given the investment horizon of 90 days Vale SA is expected to generate 43.57 times less return on investment than Merck. In addition to that, Vale SA is 1.98 times more volatile than Merck Company. It trades about 0.0 of its total potential returns per unit of risk. Merck Company is currently generating about 0.08 per unit of volatility. If you would invest  8,364  in Merck Company on January 24, 2024 and sell it today you would earn a total of  4,330  from holding Merck Company or generate 51.77% return on investment over 90 days.

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

Vale SA ADR  vs.  Merck Company

Vale SA ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vale SA ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's essential indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Merck Company

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 8 (%) 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 Vale SA and Merck

The main advantage of trading using opposite Vale SA and Merck positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vale SA 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 Vale SA ADR 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.