Correlation Between Merck and National Grid
Can any of the company-specific risk be diversified away by investing in both Merck and National Grid 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 National Grid into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Merck Company and National Grid plc, you can compare the effects of market volatilities on Merck and National Grid 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 National Grid. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and National Grid.
Diversification Opportunities for Merck and National Grid
0.63 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Merck and National is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and National Grid plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on National Grid plc 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 National Grid. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of National Grid plc has no effect on the direction of Merck i.e., Merck and National Grid go up and down completely randomly.
Pair Corralation between Merck and National Grid
Considering the 90-day investment horizon Merck is expected to generate 120.5 times less return on investment than National Grid. But when comparing it to its historical volatility, Merck Company is 3.4 times less risky than National Grid. It trades about 0.0 of its potential returns per unit of risk. National Grid plc is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest 1,141 in National Grid plc on September 3, 2024 and sell it today you would earn a total of 167.00 from holding National Grid plc or generate 14.64% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 91.72% |
| Values | Daily Returns |
Merck Company vs. National Grid plc
Performance |
| Timeline |
| Merck Company |
| National Grid plc |
Merck and National Grid Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Merck and National Grid
The main advantage of trading using opposite Merck and National Grid positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, National Grid 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 National Grid will offset losses from the drop in National Grid's long position.| Merck vs. Pfizer Inc | Merck vs. Johnson Johnson | Merck vs. Highway Holdings Limited | Merck vs. QCR Holdings |
| National Grid vs. Consolidated Edison | National Grid vs. Entergy | National Grid vs. FirstEnergy | National Grid vs. PPL Corporation |
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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.
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