Correlation Between Merck and Arqit Quantum

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

Diversification Opportunities for Merck and Arqit Quantum

0.29
  Correlation Coefficient

Modest diversification

The 3 months correlation between Merck and Arqit is 0.29. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Arqit Quantum in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Arqit Quantum 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 Arqit Quantum. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Arqit Quantum has no effect on the direction of Merck i.e., Merck and Arqit Quantum go up and down completely randomly.

Pair Corralation between Merck and Arqit Quantum

Considering the 90-day investment horizon Merck Company is expected to under-perform the Arqit Quantum. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 3.7 times less risky than Arqit Quantum. The stock trades about -0.15 of its potential returns per unit of risk. The Arqit Quantum is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  546.00  in Arqit Quantum on May 16, 2022 and sell it today you would earn a total of  85.00  from holding Arqit Quantum or generate 15.57% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Weak
Accuracy100.0%
ValuesDaily Returns

Merck Company  vs.  Arqit Quantum

 Performance (%) 
       Timeline  
Merck Company 
Merck Performance
0 of 100
Over the last 90 days Merck Company has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong basic indicators, Merck is not utilizing all of its potentials. The new stock price confusion, may contribute to short-horizon losses for the traders.

Merck Price Channel

Arqit Quantum 
Arqit Performance
2 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Arqit Quantum are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, Arqit Quantum may actually be approaching a critical reversion point that can send shares even higher in September 2022.

Arqit Price Channel

Merck and Arqit Quantum Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Merck and Arqit Quantum

The main advantage of trading using opposite Merck and Arqit Quantum positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Arqit Quantum 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 Arqit Quantum will offset losses from the drop in Arqit Quantum's long position.
The idea behind Merck Company and Arqit Quantum 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.

Arqit Quantum

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The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against Arqit Quantum as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. Arqit Quantum's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, Arqit Quantum's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to Arqit Quantum.
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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.

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