Correlation Between CSL and Merck KGaA

Can any of the company-specific risk be diversified away by investing in both CSL and Merck KGaA 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 CSL and Merck KGaA into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between CSL and Merck KGaA ADR, you can compare the effects of market volatilities on CSL and Merck KGaA 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 CSL with a short position of Merck KGaA. Check out your portfolio center. Please also check ongoing floating volatility patterns of CSL and Merck KGaA.

Diversification Opportunities for CSL and Merck KGaA

-0.44

Correlation Coefficient

CSL  Merck KGaA

Very good diversification

The 3 months correlation between CSL and Merck is -0.44. Overlapping area represents the amount of risk that can be diversified away by holding CSL and Merck KGaA ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck KGaA ADR and CSL 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 CSL are associated (or correlated) with Merck KGaA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Merck KGaA ADR has no effect on the direction of CSL i.e., CSL and Merck KGaA go up and down completely randomly.

Pair Corralation between CSL and Merck KGaA

Assuming the 90 days horizon CSL is expected to generate 0.81 times more return on investment than Merck KGaA. However, CSL is 1.24 times less risky than Merck KGaA. It trades about 0.15 of its potential returns per unit of risk. Merck KGaA ADR is currently generating about -0.1 per unit of risk. If you would invest  7,621  in CSL on May 13, 2025 and sell it today you would earn a total of  974.00  from holding CSL or generate 12.78% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

CSL  vs.  Merck KGaA ADR

CSL

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in CSL are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile essential indicators, CSL showed solid returns over the last few months and may actually be approaching a breakup point.

Merck KGaA ADR

Risk-Adjusted Performance

Weakest

Over the last 90 days Merck KGaA ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's technical and fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with CSL and Merck KGaA

The main advantage of trading using opposite CSL and Merck KGaA positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if CSL position performs unexpectedly, Merck KGaA 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 KGaA will offset losses from the drop in Merck KGaA's long position.

The idea behind CSL and Merck KGaA 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.

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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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.