Correlation Between Merck and Microsoft
Can any of the company-specific risk be diversified away by investing in both Merck and Microsoft 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 Microsoft into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Merck Company and Microsoft, you can compare the effects of market volatilities on Merck and Microsoft 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 Microsoft. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Microsoft.
Diversification Opportunities for Merck and Microsoft
Poor diversification
The 3 months correlation between Merck and Microsoft is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Microsoft in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microsoft 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 Microsoft. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Microsoft has no effect on the direction of Merck i.e., Merck and Microsoft go up and down completely randomly.
Pair Corralation between Merck and Microsoft
Considering the 90-day investment horizon Merck Company is expected to generate 0.67 times more return on investment than Microsoft. However, Merck Company is 1.5 times less risky than Microsoft. It trades about 0.09 of its potential returns per unit of risk. Microsoft is currently generating about 0.05 per unit of risk. If you would invest 8,185 in Merck Company on December 30, 2023 and sell it today you would earn a total of 5,010 from holding Merck Company or generate 61.21% return on investment over 90 days.
Time Period | 3 Months [change] |
Direction | Moves Together |
Strength | Significant |
Accuracy | 100.0% |
Values | Daily Returns |
Merck Company vs. Microsoft
Performance |
Timeline |
Merck Company |
Microsoft |
Merck and Microsoft Volatility Contrast
Predicted Return Density |
Returns |
Pair Trading with Merck and Microsoft
The main advantage of trading using opposite Merck and Microsoft positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Microsoft 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 Microsoft will offset losses from the drop in Microsoft's long position.The idea behind Merck Company and Microsoft 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.Microsoft vs. Aurora Mobile | Microsoft vs. Nextnav Acquisition Corp | Microsoft vs. Zscaler | Microsoft vs. DigitalOcean Holdings |
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 Portfolio File Import module to quickly import all of your third-party portfolios from your local drive in csv format.
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