Correlation Between Merck and Aviat Networks

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

By analyzing existing cross correlation between Merck Company and Aviat Networks, you can compare the effects of market volatilities on Merck and Aviat Networks 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 Aviat Networks. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Aviat Networks.

Diversification Opportunities for Merck and Aviat Networks

0.41

Correlation Coefficient

Merck  Aviat Networks

Very weak diversification

The 3 months correlation between Merck and Aviat is 0.41. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Aviat Networks in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Aviat Networks 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 Aviat Networks. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Aviat Networks has no effect on the direction of Merck i.e., Merck and Aviat Networks go up and down completely randomly.

Pair Corralation between Merck and Aviat Networks

Considering the 90-day investment horizon Merck Company is expected to generate 0.58 times more return on investment than Aviat Networks. However, Merck Company is 1.72 times less risky than Aviat Networks. It trades about -0.11 of its potential returns per unit of risk. Aviat Networks is currently generating about -0.1 per unit of risk. If you would invest  12,705  in Merck Company on June 29, 2024 and sell it today you would lose (1,396) from holding Merck Company or give up 10.99% of portfolio value over 90 days.

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

Merck Company  vs.  Aviat Networks

Merck Company

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Merck Company has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain persistent and the latest mess on Wall Street may also be a sign of long-standing gains for the company institutional investors.

Aviat Networks

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Aviat Networks has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of uncertain performance in the last few months, the Stock's basic indicators remain fairly stable which may send shares a bit higher in October 2024. The latest fuss may also be a sign of long-term up-swing for the venture sophisticated investors.

Pair Trading with Merck and Aviat Networks

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

The idea behind Merck Company and Aviat Networks 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.