Correlation Between Verizon Communications and Merck

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

Diversification Opportunities for Verizon Communications and Merck

0.4
  Correlation Coefficient

Very weak diversification

The 3 months correlation between Verizon and Merck is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Verizon Communications and Merck Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck Company and Verizon Communications 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 Verizon Communications 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 Verizon Communications i.e., Verizon Communications and Merck go up and down completely randomly.

Pair Corralation between Verizon Communications and Merck

Allowing for the 90-day total investment horizon Verizon Communications is expected to under-perform the Merck. But the stock apears to be less risky and, when comparing its historical volatility, Verizon Communications is 1.26 times less risky than Merck. The stock trades about -0.04 of its potential returns per unit of risk. The Merck Company is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  7,595  in Merck Company on May 17, 2022 and sell it today you would earn a total of  1,465  from holding Merck Company or generate 19.29% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthWeak
Accuracy100.0%
ValuesDaily Returns

Verizon Communications  vs.  Merck Company

 Performance (%) 
       Timeline  
Verizon Communications 
Verizon Performance
0 of 100
Over the last 90 days Verizon Communications has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Verizon Communications is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Verizon Price Channel

Merck Company 
Merck Performance
0 of 100
Over the last 90 days Merck Company has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong basic indicators, Merck is not utilizing all of its potentials. The latest stock price confusion, may contribute to short-horizon losses for the traders.

Merck Price Channel

Verizon Communications and Merck Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Verizon Communications and Merck

The main advantage of trading using opposite Verizon Communications and Merck positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Verizon Communications 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 Verizon Communications 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 Earnings Calls module to check upcoming earnings announcements updated hourly across public exchanges.

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