Correlation Between Merck and Universal

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

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

Diversification Opportunities for Merck and Universal

-0.33

Correlation Coefficient

Merck  Universal

Very good diversification

The 3 months correlation between Merck and Universal is -0.33. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Universal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Universal 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 Universal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Universal has no effect on the direction of Merck i.e., Merck and Universal go up and down completely randomly.

Pair Corralation between Merck and Universal

Considering the 90-day investment horizon Merck Company is expected to generate 1.03 times more return on investment than Universal. However, Merck is 1.03 times more volatile than Universal. It trades about -0.02 of its potential returns per unit of risk. Universal is currently generating about -0.05 per unit of risk. If you would invest  8,202  in Merck Company on May 5, 2025 and sell it today you would lose (273.00) from holding Merck Company or give up 3.33% of portfolio value over 90 days.

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

Merck Company  vs.  Universal

Merck Company

Risk-Adjusted Performance

Very Weak

Over the last 90 days Merck Company has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, Merck is not utilizing all of its potentials. The current stock price mess, may contribute to short-term losses for the institutional investors.

Universal

Risk-Adjusted Performance

Very Weak

Over the last 90 days Universal has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Universal is not utilizing all of its potentials. The recent stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Merck and Universal

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

The idea behind Merck Company and Universal 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.