Correlation Between Merck and Lithium Australia
Can any of the company-specific risk be diversified away by investing in both Merck and Lithium Australia 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 Lithium Australia into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Merck Company and Lithium Australia NL, you can compare the effects of market volatilities on Merck and Lithium Australia 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 Lithium Australia. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Lithium Australia.
Diversification Opportunities for Merck and Lithium Australia
-0.41 | Correlation Coefficient |
Very good diversification
The 3 months correlation between Merck and Lithium is -0.41. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Lithium Australia NL in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lithium Australia 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 Lithium Australia. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lithium Australia has no effect on the direction of Merck i.e., Merck and Lithium Australia go up and down completely randomly.
Pair Corralation between Merck and Lithium Australia
Considering the 90-day investment horizon Merck Company is expected to under-perform the Lithium Australia. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 58.88 times less risky than Lithium Australia. The stock trades about -0.08 of its potential returns per unit of risk. The Lithium Australia NL is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest 1.70 in Lithium Australia NL on September 3, 2024 and sell it today you would lose (1.00) from holding Lithium Australia NL or give up 58.82% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Merck Company vs. Lithium Australia NL
Performance |
| Timeline |
| Merck Company |
| Lithium Australia |
Merck and Lithium Australia Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Merck and Lithium Australia
The main advantage of trading using opposite Merck and Lithium Australia positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Lithium Australia 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 Lithium Australia will offset losses from the drop in Lithium Australia's long position.| Merck vs. Pfizer Inc | Merck vs. Johnson Johnson | Merck vs. Highway Holdings Limited | Merck vs. QCR Holdings |
| Lithium Australia vs. Grid Metals Corp | Lithium Australia vs. Latin Metals | Lithium Australia vs. First American Silver | Lithium Australia vs. IGO Limited |
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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.
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