Correlation Between Merck and NightFood Holdings
Can any of the company-specific risk be diversified away by investing in both Merck and NightFood Holdings 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 NightFood Holdings into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Merck Company and NightFood Holdings, you can compare the effects of market volatilities on Merck and NightFood Holdings 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 NightFood Holdings. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and NightFood Holdings.
Diversification Opportunities for Merck and NightFood Holdings
0.84 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Merck and NightFood is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and NightFood Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NightFood Holdings 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 NightFood Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NightFood Holdings has no effect on the direction of Merck i.e., Merck and NightFood Holdings go up and down completely randomly.
Pair Corralation between Merck and NightFood Holdings
Considering the 90-day investment horizon Merck is expected to generate 72.1 times less return on investment than NightFood Holdings. But when comparing it to its historical volatility, Merck Company is 10.54 times less risky than NightFood Holdings. It trades about 0.01 of its potential returns per unit of risk. NightFood Holdings is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest 1.79 in NightFood Holdings on September 2, 2024 and sell it today you would lose (0.63) from holding NightFood Holdings or give up 35.2% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Merck Company vs. NightFood Holdings
Performance |
| Timeline |
| Merck Company |
| NightFood Holdings |
Merck and NightFood Holdings Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Merck and NightFood Holdings
The main advantage of trading using opposite Merck and NightFood Holdings positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, NightFood Holdings 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 NightFood Holdings will offset losses from the drop in NightFood Holdings' long position.The idea behind Merck Company and NightFood Holdings 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.| NightFood Holdings vs. The A2 Milk | NightFood Holdings vs. Artisan Consumer Goods | NightFood Holdings vs. General Mills |
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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