Correlation Between Merck KGaA and CSL

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

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

Diversification Opportunities for Merck KGaA and CSL

-0.39

Correlation Coefficient

Merck KGaA  CSL

Very good diversification

The 3 months correlation between Merck and CSL is -0.39. Overlapping area represents the amount of risk that can be diversified away by holding Merck KGaA ADR and CSL in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CSL and Merck KGaA 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 KGaA ADR are associated (or correlated) with CSL. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CSL has no effect on the direction of Merck KGaA i.e., Merck KGaA and CSL go up and down completely randomly.

Pair Corralation between Merck KGaA and CSL

Assuming the 90 days horizon Merck KGaA ADR is expected to under-perform the CSL. In addition to that, Merck KGaA is 1.23 times more volatile than CSL. It trades about -0.08 of its total potential returns per unit of risk. CSL is currently generating about 0.14 per unit of volatility. If you would invest  7,665  in CSL on May 14, 2025 and sell it today you would earn a total of  930.00  from holding CSL or generate 12.13% return on investment over 90 days.

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

Merck KGaA ADR  vs.  CSL

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.

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 may actually be approaching a critical reversion point that can send shares even higher in September 2025.

Pair Trading with Merck KGaA and CSL

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

The idea behind Merck KGaA ADR and CSL 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.