Correlation Between Merck and Encanto Potash
Can any of the company-specific risk be diversified away by investing in both Merck and Encanto Potash 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 Encanto Potash into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Merck Company and Encanto Potash Corp, you can compare the effects of market volatilities on Merck and Encanto Potash 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 Encanto Potash. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Encanto Potash.
Diversification Opportunities for Merck and Encanto Potash
0.86 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Merck and Encanto is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Encanto Potash Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Encanto Potash Corp 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 Encanto Potash. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Encanto Potash Corp has no effect on the direction of Merck i.e., Merck and Encanto Potash go up and down completely randomly.
Pair Corralation between Merck and Encanto Potash
Considering the 90-day investment horizon Merck Company is expected to under-perform the Encanto Potash. In addition to that, Merck is 1.2 times more volatile than Encanto Potash Corp. It trades about -0.16 of its total potential returns per unit of risk. Encanto Potash Corp is currently generating about -0.13 per unit of volatility. If you would invest 3.37 in Encanto Potash Corp on September 2, 2024 and sell it today you would lose (0.28) from holding Encanto Potash Corp or give up 8.31% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 98.46% |
| Values | Daily Returns |
Merck Company vs. Encanto Potash Corp
Performance |
| Timeline |
| Merck Company |
| Encanto Potash Corp |
Merck and Encanto Potash Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Merck and Encanto Potash
The main advantage of trading using opposite Merck and Encanto Potash positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Encanto Potash 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 Encanto Potash will offset losses from the drop in Encanto Potash's long position.The idea behind Merck Company and Encanto Potash Corp 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.| Encanto Potash vs. Rio Tinto ADR | Encanto Potash vs. BHP Group Limited | Encanto Potash vs. Teck Resources Ltd | Encanto Potash vs. MP Materials 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.
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