Correlation Between Merck KGaA and Bayer AG
Can any of the company-specific risk be diversified away by investing in both Merck KGaA and Bayer AG 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 KGaA and Bayer AG into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Merck KGaA ADR and Bayer AG, you can compare the effects of market volatilities on Merck KGaA and Bayer AG 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 KGaA with a short position of Bayer AG. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck KGaA and Bayer AG.
Diversification Opportunities for Merck KGaA and Bayer AG
0.83 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Merck and Bayer is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Merck KGaA ADR and Bayer AG in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bayer AG and Merck KGaA 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 KGaA ADR are associated (or correlated) with Bayer AG. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bayer AG has no effect on the direction of Merck KGaA i.e., Merck KGaA and Bayer AG go up and down completely randomly.
Pair Corralation between Merck KGaA and Bayer AG
Assuming the 90 days horizon Merck KGaA ADR is expected to generate 0.78 times more return on investment than Bayer AG. However, Merck KGaA ADR is 1.29 times less risky than Bayer AG. It trades about -0.02 of its potential returns per unit of risk. Bayer AG is currently generating about -0.1 per unit of risk. If you would invest 3,580 in Merck KGaA ADR on September 2, 2024 and sell it today you would lose (591.00) from holding Merck KGaA ADR or give up 16.51% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 99.46% |
| Values | Daily Returns |
Merck KGaA ADR vs. Bayer AG
Performance |
| Timeline |
| Merck KGaA ADR |
| Bayer AG |
Merck KGaA and Bayer AG Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Merck KGaA and Bayer AG
The main advantage of trading using opposite Merck KGaA and Bayer AG positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck KGaA position performs unexpectedly, Bayer AG 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 Bayer AG will offset losses from the drop in Bayer AG's long position.| Merck KGaA vs. Holloman Energy Corp | Merck KGaA vs. cbdMD Inc | Merck KGaA vs. Evolus Inc | Merck KGaA vs. CV Sciences |
| Bayer AG vs. Globalfoundries | Bayer AG vs. FormFactor | Bayer AG vs. ASE Industrial Holding | Bayer AG vs. National Beverage Corp |
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 Piotroski F Score module to get Piotroski F Score based on the binary analysis strategy of nine different fundamentals.
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