Correlation Between Merck and Collegium Pharmaceutical
Can any of the company-specific risk be diversified away by investing in both Merck and Collegium Pharmaceutical 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 Collegium Pharmaceutical into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Merck Company and Collegium Pharmaceutical, you can compare the effects of market volatilities on Merck and Collegium Pharmaceutical 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 Collegium Pharmaceutical. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Collegium Pharmaceutical.
Diversification Opportunities for Merck and Collegium Pharmaceutical
0.84 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Merck and Collegium is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Collegium Pharmaceutical in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Collegium Pharmaceutical 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 Collegium Pharmaceutical. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Collegium Pharmaceutical has no effect on the direction of Merck i.e., Merck and Collegium Pharmaceutical go up and down completely randomly.
Pair Corralation between Merck and Collegium Pharmaceutical
Considering the 90-day investment horizon Merck Company is expected to generate 0.53 times more return on investment than Collegium Pharmaceutical. However, Merck Company is 1.89 times less risky than Collegium Pharmaceutical. It trades about -0.02 of its potential returns per unit of risk. Collegium Pharmaceutical is currently generating about -0.21 per unit of risk. If you would invest 10,232 in Merck Company on September 1, 2024 and sell it today you would lose (68.00) from holding Merck Company or give up 0.66% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Merck Company vs. Collegium Pharmaceutical
Performance |
| Timeline |
| Merck Company |
| Collegium Pharmaceutical |
Merck and Collegium Pharmaceutical Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Merck and Collegium Pharmaceutical
The main advantage of trading using opposite Merck and Collegium Pharmaceutical positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Collegium Pharmaceutical 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 Collegium Pharmaceutical will offset losses from the drop in Collegium Pharmaceutical's long position.The idea behind Merck Company and Collegium Pharmaceutical 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.
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