Correlation Between Merck and Twitter

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

Diversification Opportunities for Merck and Twitter

0.25
  Correlation Coefficient

Modest diversification

The 3 months correlation between Merck and Twitter is 0.25. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Twitter in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Twitter 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 Twitter. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Twitter has no effect on the direction of Merck i.e., Merck and Twitter go up and down completely randomly.

Pair Corralation between Merck and Twitter

Considering the 90-day investment horizon Merck is expected to generate 1.45 times less return on investment than Twitter. But when comparing it to its historical volatility, Merck Company is 2.78 times less risky than Twitter. It trades about 0.09 of its potential returns per unit of risk. Twitter is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  4,701  in Twitter on December 30, 2023 and sell it today you would earn a total of  669.00  from holding Twitter or generate 14.23% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Weak
Accuracy28.34%
ValuesDaily Returns

Merck Company  vs.  Twitter

 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.
Twitter 

Risk-Adjusted Performance

0 of 100

 
Low
 
High
Very Weak
Over the last 90 days Twitter has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable basic indicators, Twitter is not utilizing all of its potentials. The current stock price agitation, may contribute to short-term losses for the retail investors.

Merck and Twitter Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Merck and Twitter

The main advantage of trading using opposite Merck and Twitter positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Twitter 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 Twitter will offset losses from the drop in Twitter's long position.
The idea behind Merck Company and Twitter 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .

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