Correlation Between Merck and Energy Select
Can any of the company-specific risk be diversified away by investing in both Merck and Energy Select 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 Energy Select into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Merck Company and Energy Select Sector, you can compare the effects of market volatilities on Merck and Energy Select 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 Energy Select. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Energy Select.
Diversification Opportunities for Merck and Energy Select
-0.01 | Correlation Coefficient |
Good diversification
The 3 months correlation between Merck and Energy is -0.01. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Energy Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy Select Sector 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 Energy Select. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy Select Sector has no effect on the direction of Merck i.e., Merck and Energy Select go up and down completely randomly.
Pair Corralation between Merck and Energy Select
Considering the 90-day investment horizon Merck Company is expected to under-perform the Energy Select. In addition to that, Merck is 1.68 times more volatile than Energy Select Sector. It trades about -0.35 of its total potential returns per unit of risk. Energy Select Sector is currently generating about -0.15 per unit of volatility. If you would invest 9,396 in Energy Select Sector on November 18, 2024 and sell it today you would lose (389.00) from holding Energy Select Sector or give up 4.14% of portfolio value over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
Merck Company vs. Energy Select Sector
Performance |
| Timeline |
| Merck Company |
| Energy Select Sector |
Merck and Energy Select Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Merck and Energy Select
The main advantage of trading using opposite Merck and Energy Select positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Energy Select 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 Energy Select will offset losses from the drop in Energy Select's long position.The idea behind Merck Company and Energy Select Sector 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.| Energy Select vs. Financial Select Sector | Energy Select vs. Health Care Select | Energy Select vs. Technology Select Sector | Energy Select vs. Utilities Select Sector |
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 Insider Screener module to find insiders across different sectors to evaluate their impact on performance.
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