Correlation Between Merck and Red Light
Can any of the company-specific risk be diversified away by investing in both Merck and Red Light 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 Red Light into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Merck Company and Red Light Holland, you can compare the effects of market volatilities on Merck and Red Light 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 Red Light. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Red Light.
Diversification Opportunities for Merck and Red Light
Very good diversification
The 3 months correlation between Merck and Red is -0.43. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Red Light Holland in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Red Light Holland 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 Red Light. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Red Light Holland has no effect on the direction of Merck i.e., Merck and Red Light go up and down completely randomly.
Pair Corralation between Merck and Red Light
Considering the 90-day investment horizon Merck Company is expected to under-perform the Red Light. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 6.62 times less risky than Red Light. The stock trades about -0.02 of its potential returns per unit of risk. The Red Light Holland is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest 2.40 in Red Light Holland on September 1, 2024 and sell it today you would earn a total of 0.99 from holding Red Light Holland or generate 41.25% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 95.45% |
| Values | Daily Returns |
Merck Company vs. Red Light Holland
Performance |
| Timeline |
| Merck Company |
| Red Light Holland |
Merck and Red Light Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Merck and Red Light
The main advantage of trading using opposite Merck and Red Light positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Red Light 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 Red Light will offset losses from the drop in Red Light's long position.The idea behind Merck Company and Red Light Holland 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.| Red Light vs. Holloman Energy Corp | Red Light vs. cbdMD Inc | Red Light vs. Evolus Inc | Red Light vs. CV Sciences |
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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.
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