Correlation Between Merck and Novartis
Can any of the company-specific risk be diversified away by investing in both Merck and Novartis 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 Merck and Novartis into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Merck Company and Novartis AG ADR, you can compare the effects of market volatilities on Merck and Novartis 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 Merck with a short position of Novartis. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Novartis.
Diversification Opportunities for Merck and Novartis
Excellent diversification
The 3 months correlation between Merck and Novartis is -0.59. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Novartis AG ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Novartis AG ADR and Merck 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 Merck Company are associated (or correlated) with Novartis. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Novartis AG ADR has no effect on the direction of Merck i.e., Merck and Novartis go up and down completely randomly.
Pair Corralation between Merck and Novartis
Considering the 90-day investment horizon Merck is expected to generate 2.5 times less return on investment than Novartis. In addition to that, Merck is 1.05 times more volatile than Novartis AG ADR. It trades about 0.05 of its total potential returns per unit of risk. Novartis AG ADR is currently generating about 0.13 per unit of volatility. If you would invest 9,527 in Novartis AG ADR on January 26, 2024 and sell it today you would earn a total of 308.00 from holding Novartis AG ADR or generate 3.23% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Merck Company vs. Novartis AG ADR
Performance |
| Timeline |
| Merck Company |
| Novartis AG ADR |
Merck and Novartis Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Merck and Novartis
The main advantage of trading using opposite Merck and Novartis positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Novartis 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 Novartis will offset losses from the drop in Novartis' long position.The idea behind Merck Company and Novartis AG ADR 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.| Novartis vs. AstraZeneca PLC ADR | Novartis vs. GlaxoSmithKline PLC ADR | Novartis vs. Roche Holding Ltd | Novartis vs. Bristol Myers Squibb |
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 Funds Screener module to find actively-traded funds from around the world traded on over 30 global exchanges.
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