Correlation Between Merck and Disney

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

Diversification Opportunities for Merck and Disney

0.73
  Correlation Coefficient

Poor diversification

The 3 months correlation between Merck and Disney is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Walt Disney in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Walt Disney 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 Disney. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Walt Disney has no effect on the direction of Merck i.e., Merck and Disney go up and down completely randomly.

Pair Corralation between Merck and Disney

Considering the 90-day investment horizon Merck is expected to generate 2.72 times less return on investment than Disney. In addition to that, Merck is 1.18 times more volatile than Walt Disney. It trades about 0.13 of its total potential returns per unit of risk. Walt Disney is currently generating about 0.41 per unit of volatility. If you would invest  11,080  in Walt Disney on December 30, 2023 and sell it today you would earn a total of  1,156  from holding Walt Disney or generate 10.43% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Merck Company  vs.  Walt Disney

 Performance 
       Timeline  
Merck Company 

Risk-Adjusted Performance

19 of 100

 
Low
 
High
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. Despite quite weak basic indicators, Merck disclosed solid returns over the last few months and may actually be approaching a breakup point.
Walt Disney 

Risk-Adjusted Performance

20 of 100

 
Low
 
High
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Walt Disney are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain forward indicators, Disney unveiled solid returns over the last few months and may actually be approaching a breakup point.

Merck and Disney Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Merck and Disney

The main advantage of trading using opposite Merck and Disney positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Disney 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 Disney will offset losses from the drop in Disney's long position.
The idea behind Merck Company and Walt Disney 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.

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