Correlation Between Merck and Consumer Discretionary

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Can any of the company-specific risk be diversified away by investing in both Merck and Consumer Discretionary 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 Consumer Discretionary into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Merck Company and Consumer Discretionary Select, you can compare the effects of market volatilities on Merck and Consumer Discretionary 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 Consumer Discretionary. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and Consumer Discretionary.

Diversification Opportunities for Merck and Consumer Discretionary

0.01
  Correlation Coefficient

Significant diversification

The 3 months correlation between Merck and Consumer is 0.01. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Consumer Discretionary Select in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Consumer Discretionary 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 Consumer Discretionary. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Consumer Discretionary has no effect on the direction of Merck i.e., Merck and Consumer Discretionary go up and down completely randomly.

Pair Corralation between Merck and Consumer Discretionary

Considering the 90-day investment horizon Merck Company is expected to under-perform the Consumer Discretionary. In addition to that, Merck is 2.54 times more volatile than Consumer Discretionary Select. It trades about -0.35 of its total potential returns per unit of risk. Consumer Discretionary Select is currently generating about -0.05 per unit of volatility. If you would invest  22,922  in Consumer Discretionary Select on November 18, 2024 and sell it today you would lose (222.00) from holding Consumer Discretionary Select or give up 0.97% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthInsignificant
Accuracy100.0%
ValuesDaily Returns

Merck Company  vs.  Consumer Discretionary Select

 Performance 
       Timeline  
Merck Company 

Risk-Adjusted Performance

Very Weak

 
Weak
 
Strong
Over the last 90 days Merck Company has generated negative risk-adjusted returns adding no value to investors with long positions. Despite abnormal performance in the last few months, the Stock's basic indicators remain quite persistent which may send shares a bit higher in March 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.
Consumer Discretionary 

Risk-Adjusted Performance

Modest

 
Weak
 
Strong
Compared to the overall equity markets, risk-adjusted returns on investments in Consumer Discretionary Select are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong essential indicators, Consumer Discretionary is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Merck and Consumer Discretionary Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Merck and Consumer Discretionary

The main advantage of trading using opposite Merck and Consumer Discretionary positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Consumer Discretionary 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 Consumer Discretionary will offset losses from the drop in Consumer Discretionary's long position.
The idea behind Merck Company and Consumer Discretionary Select 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.
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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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.

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