Correlation Between Merck and Dimensional Small

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

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

Diversification Opportunities for Merck and Dimensional Small

0.36

Correlation Coefficient

Merck  Dimensional Small

Weak diversification

The 3 months correlation between Merck and Dimensional is 0.36. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Dimensional Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dimensional Small Cap 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 Dimensional Small. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dimensional Small Cap has no effect on the direction of Merck i.e., Merck and Dimensional Small go up and down completely randomly.

Pair Corralation between Merck and Dimensional Small

Considering the 90-day investment horizon Merck Company is expected to generate 1.14 times more return on investment than Dimensional Small. However, Merck is 1.14 times more volatile than Dimensional Small Cap. It trades about 0.14 of its potential returns per unit of risk. Dimensional Small Cap is currently generating about 0.02 per unit of risk. If you would invest  12,051  in Merck Company on March 14, 2024 and sell it today you would earn a total of  1,133  from holding Merck Company or generate 9.4% 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.  Dimensional Small Cap

Merck Company

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite quite weak basic indicators, Merck may actually be approaching a critical reversion point that can send shares even higher in July 2024.

Dimensional Small Cap

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Dimensional Small Cap are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, Dimensional Small is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Merck and Dimensional Small

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

The idea behind Merck Company and Dimensional Small Cap 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 Top Crypto Exchanges module to search and analyze digital assets across top global cryptocurrency exchanges.