Correlation Between Merck and Alphabet
Can any of the company-specific risk be diversified away by investing in both Merck and Alphabet 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 Alphabet into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Merck Company and Alphabet Inc Class C, you can compare the effects of market volatilities on Merck and Alphabet 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 Alphabet. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Alphabet.
Diversification Opportunities for Merck and Alphabet
Modest diversification
The 3 months correlation between Merck and Alphabet is 0.22. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Alphabet Inc Class C in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Alphabet Class C 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 Alphabet. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Alphabet Class C has no effect on the direction of Merck i.e., Merck and Alphabet go up and down completely randomly.
Pair Corralation between Merck and Alphabet
Considering the 90-day investment horizon Merck is expected to generate 4.37 times less return on investment than Alphabet. But when comparing it to its historical volatility, Merck Company is 1.03 times less risky than Alphabet. It trades about 0.06 of its potential returns per unit of risk. Alphabet Inc Class C is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest 15,115 in Alphabet Inc Class C on January 25, 2024 and sell it today you would earn a total of 995.00 from holding Alphabet Inc Class C or generate 6.58% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Merck Company vs. Alphabet Inc Class C
Performance |
| Timeline |
| Merck Company |
| Alphabet Class C |
Merck and Alphabet Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Merck and Alphabet
The main advantage of trading using opposite Merck and Alphabet positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Alphabet 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 Alphabet will offset losses from the drop in Alphabet's long position.The idea behind Merck Company and Alphabet Inc Class C 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.Check out your portfolio center.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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.
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