Correlation Between Disney and Merck
Can any of the company-specific risk be diversified away by investing in both Disney 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 Disney and Merck into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Walt Disney and Merck Company, you can compare the effects of market volatilities on Disney 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 Disney with a short position of Merck. Check out your portfolio center. Please also check ongoing floating volatility patterns of Disney and Merck.
Diversification Opportunities for Disney and Merck
Poor diversification
The 3 months correlation between Disney and Merck is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Walt Disney and Merck Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck Company and Disney 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 Walt Disney 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 Disney i.e., Disney and Merck go up and down completely randomly.
Pair Corralation between Disney and Merck
Considering the 90-day investment horizon Walt Disney is expected to under-perform the Merck. But the stock apears to be less risky and, when comparing its historical volatility, Walt Disney is 1.03 times less risky than Merck. The stock trades about -0.17 of its potential returns per unit of risk. The Merck Company is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest 12,531 in Merck Company on January 25, 2024 and sell it today you would earn a total of 185.00 from holding Merck Company or generate 1.48% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Walt Disney vs. Merck Company
Performance |
| Timeline |
| Walt Disney |
| Merck Company |
Disney and Merck Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Disney and Merck
The main advantage of trading using opposite Disney and Merck positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Disney 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.| Disney vs. Roku Inc | Disney vs. Paramount Global Class | Disney vs. Warner Bros Discovery | Disney vs. Paramount Global Class |
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 the Earnings Calls module to check upcoming earnings announcements updated hourly across public exchanges.
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