Correlation Between Merck and Davis Select

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Can any of the company-specific risk be diversified away by investing in both Merck and Davis Select 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 Davis Select into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Merck Company and Davis Select Equity, you can compare the effects of market volatilities on Merck and Davis Select 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 Davis Select. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Davis Select.

Diversification Opportunities for Merck and Davis Select

-0.83
  Correlation Coefficient

Pay attention - limited upside

The 3 months correlation between Merck and Davis is -0.83. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Davis Select Equity in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Davis Select Equity 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 Davis Select. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Davis Select Equity has no effect on the direction of Merck i.e., Merck and Davis Select go up and down completely randomly.

Pair Corralation between Merck and Davis Select

Considering the 90-day investment horizon Merck Company is expected to under-perform the Davis Select. In addition to that, Merck is 1.41 times more volatile than Davis Select Equity. It trades about -0.11 of its total potential returns per unit of risk. Davis Select Equity is currently generating about 0.1 per unit of volatility. If you would invest  3,978  in Davis Select Equity on September 1, 2024 and sell it today you would earn a total of  517.00  from holding Davis Select Equity or generate 13.0% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthSignificant
Accuracy99.21%
ValuesDaily Returns

Merck Company  vs.  Davis Select Equity

 Performance 
       Timeline  
Merck Company 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days Merck Company has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest abnormal performance, the Stock's basic indicators remain persistent and the latest mess on Wall Street may also be a sign of long-standing gains for the company institutional investors.
Davis Select Equity 

Risk-Adjusted Performance

12 of 100

 
Weak
 
Strong
Good
Compared to the overall equity markets, risk-adjusted returns on investments in Davis Select Equity are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite somewhat fragile basic indicators, Davis Select may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Merck and Davis Select Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Merck and Davis Select

The main advantage of trading using opposite Merck and Davis Select positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Davis Select 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 Davis Select will offset losses from the drop in Davis Select's long position.
The idea behind Merck Company and Davis Select Equity 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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.

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