Correlation Between Merck and GENERAL

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

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

Diversification Opportunities for Merck and GENERAL

-0.45

Correlation Coefficient

Merck  GENERAL

Very good diversification

The 3 months correlation between Merck and GENERAL is -0.45. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and GENERAL DYNAMICS PORATION in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on GENERAL DYNAMICS PORATION 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 GENERAL. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of GENERAL DYNAMICS PORATION has no effect on the direction of Merck i.e., Merck and GENERAL go up and down completely randomly.

Pair Corralation between Merck and GENERAL

Considering the 90-day investment horizon Merck Company is expected to generate 0.95 times more return on investment than GENERAL. However, Merck Company is 1.06 times less risky than GENERAL. It trades about -0.15 of its potential returns per unit of risk. GENERAL DYNAMICS PORATION is currently generating about -0.27 per unit of risk. If you would invest  11,456  in Merck Company on July 12, 2024 and sell it today you would lose (429.00) from holding Merck Company or give up 3.74% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	95.65%
Values	Daily Returns

Merck Company  vs.  GENERAL DYNAMICS PORATION

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 conflicting performance in the last few months, the Stock's basic indicators remain quite persistent which may send shares a bit higher in November 2024. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

GENERAL DYNAMICS PORATION

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days GENERAL DYNAMICS PORATION has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, GENERAL is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Merck and GENERAL

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

The idea behind Merck Company and GENERAL DYNAMICS PORATION 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.