Correlation Between Merck and Legal General
Can any of the company-specific risk be diversified away by investing in both Merck and Legal General 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 Legal General into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Merck Company and Legal General Group, you can compare the effects of market volatilities on Merck and Legal General 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 Legal General. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Legal General.
Diversification Opportunities for Merck and Legal General
0.8 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Merck and Legal is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Legal General Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Legal General Group 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 Legal General. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Legal General Group has no effect on the direction of Merck i.e., Merck and Legal General go up and down completely randomly.
Pair Corralation between Merck and Legal General
Considering the 90-day investment horizon Merck Company is expected to under-perform the Legal General. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 1.14 times less risky than Legal General. The stock trades about 0.0 of its potential returns per unit of risk. The Legal General Group is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest 1,308 in Legal General Group on August 24, 2024 and sell it today you would earn a total of 82.00 from holding Legal General Group or generate 6.27% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Merck Company vs. Legal General Group
Performance |
| Timeline |
| Merck Company |
| Legal General Group |
Merck and Legal General Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Merck and Legal General
The main advantage of trading using opposite Merck and Legal General positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Legal General 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 Legal General will offset losses from the drop in Legal General's long position.The idea behind Merck Company and Legal General Group 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.| Legal General vs. Minerals Technologies | Legal General vs. NETGEAR | Legal General vs. Skechers USA | Legal General vs. Arrow Electronics |
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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.
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