Correlation Between GM and Merck
Can any of the company-specific risk be diversified away by investing in both GM 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 GM and Merck into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between General Motors and Merck Company, you can compare the effects of market volatilities on GM 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 GM with a short position of Merck. Check out your portfolio center. Please also check ongoing floating volatility patterns of GM and Merck.
Diversification Opportunities for GM and Merck
Poor diversification
The 3 months correlation between GM and Merck is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding General Motors and Merck Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck Company and GM 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 General Motors 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 GM i.e., GM and Merck go up and down completely randomly.
Pair Corralation between GM and Merck
Allowing for the 90-day total investment horizon General Motors is expected to generate 1.24 times more return on investment than Merck. However, GM is 1.24 times more volatile than Merck Company. It trades about 0.08 of its potential returns per unit of risk. Merck Company is currently generating about 0.05 per unit of risk. If you would invest 4,400 in General Motors on January 26, 2024 and sell it today you would earn a total of 108.00 from holding General Motors or generate 2.45% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
General Motors vs. Merck Company
Performance |
| Timeline |
| General Motors |
| Merck Company |
GM and Merck Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with GM and Merck
The main advantage of trading using opposite GM and Merck positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GM 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 General Motors 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 the Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.
Other Complementary Tools
| Portfolio Analyzer Portfolio analysis module that provides access to portfolio diagnostics and optimization engine | |
| Aroon Oscillator Analyze current equity momentum using Aroon Oscillator and other momentum ratios | |
| Sync Your Broker Sync your existing holdings, watchlists, positions or portfolios from thousands of online brokerage services, banks, investment account aggregators and robo-advisors. | |
| Price Ceiling Movement Calculate and plot Price Ceiling Movement for different equity instruments | |
| Cryptocurrency Center Build and monitor diversified portfolio of extremely risky digital assets and cryptocurrency | |
| Idea Breakdown Analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes | |
| Price Transformation Use Price Transformation models to analyze the depth of different equity instruments across global markets |