Correlation Between Merck and US Brent

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

Diversification Opportunities for Merck and US Brent

0.42
  Correlation Coefficient

Very weak diversification

The 3 months correlation between Merck and US Brent is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and US Brent Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on US Brent Oil 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 US Brent. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of US Brent Oil has no effect on the direction of Merck i.e., Merck and US Brent go up and down completely randomly.

Pair Corralation between Merck and US Brent

Considering the 90-day investment horizon Merck is expected to generate 4.7 times less return on investment than US Brent. But when comparing it to its historical volatility, Merck Company is 1.8 times less risky than US Brent. It trades about 0.04 of its potential returns per unit of risk. US Brent Oil is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  1,081  in US Brent Oil on July 8, 2022 and sell it today you would earn a total of  1,959  from holding US Brent Oil or generate 181.22% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthWeak
Accuracy100.0%
ValuesDaily Returns

Merck Company  vs.  US Brent Oil

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

Merck Price Channel

US Brent Oil 
US Brent Performance
0 of 100
Over the last 90 days US Brent Oil has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, US Brent is not utilizing all of its potentials. The current stock price mess, may contribute to short-term losses for the institutional investors.

US Brent Price Channel

Merck and US Brent Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Merck and US Brent

The main advantage of trading using opposite Merck and US Brent positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, US Brent 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 US Brent will offset losses from the drop in US Brent's long position.
Merck vs. Amazon Inc
The idea behind Merck Company and US Brent Oil 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.
US Brent vs. Bank Of America
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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.

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