Correlation Between Merck and BRASIL ON

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

Diversification Opportunities for Merck and BRASIL ON

-0.09
  Correlation Coefficient

Good diversification

The 3 months correlation between Merck and BRASIL is -0.09. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and BRASIL ON NM in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BRASIL ON NM 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 BRASIL ON. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BRASIL ON NM has no effect on the direction of Merck i.e., Merck and BRASIL ON go up and down completely randomly.

Pair Corralation between Merck and BRASIL ON

Considering the 90-day investment horizon Merck is expected to generate 2.27 times less return on investment than BRASIL ON. But when comparing it to its historical volatility, Merck Company is 1.41 times less risky than BRASIL ON. It trades about 0.03 of its potential returns per unit of risk. BRASIL ON NM is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  2,690  in BRASIL ON NM on May 12, 2022 and sell it today you would earn a total of  1,273  from holding BRASIL ON NM or generate 47.32% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthInsignificant
Accuracy98.32%
ValuesDaily Returns

Merck Company  vs.  BRASIL ON NM

 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 current stock price confusion, may contribute to short-horizon losses for the traders.

Merck Price Channel

BRASIL ON NM 
BRASIL Performance
12 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in BRASIL ON NM are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, BRASIL ON reported solid returns over the last few months and may actually be approaching a breakup point.

BRASIL Price Channel

Merck and BRASIL ON Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Merck and BRASIL ON

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

BRASIL ON NM

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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 BRASIL ON 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. BRASIL ON'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, BRASIL ON'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 BRASIL ON NM.
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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.

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