Correlation Between Merck and Vanguard Institutional

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

Diversification Opportunities for Merck and Vanguard Institutional

-0.18
  Correlation Coefficient

Good diversification

The 3 months correlation between Merck and Vanguard is -0.18. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Vanguard Institutional Index in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Vanguard Institutional 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 Vanguard Institutional. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Vanguard Institutional has no effect on the direction of Merck i.e., Merck and Vanguard Institutional go up and down completely randomly.

Pair Corralation between Merck and Vanguard Institutional

Considering the 90-day investment horizon Merck Company is expected to generate 1.22 times more return on investment than Vanguard Institutional. However, Merck is 1.22 times more volatile than Vanguard Institutional Index. It trades about 0.06 of its potential returns per unit of risk. Vanguard Institutional Index is currently generating about 0.03 per unit of risk. If you would invest  6,826  in Merck Company on May 14, 2022 and sell it today you would earn a total of  2,276  from holding Merck Company or generate 33.34% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthInsignificant
Accuracy100.0%
ValuesDaily Returns

Merck Company  vs.  Vanguard Institutional Index

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

Merck Price Channel

Vanguard Institutional 
Vanguard Performance
4 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Institutional Index are ranked lower than 4 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, Vanguard Institutional is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Vanguard Price Channel

Merck and Vanguard Institutional Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Merck and Vanguard Institutional

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

Vanguard Institutional Index

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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 Vanguard Institutional 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. Vanguard Institutional'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, Vanguard Institutional'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 Vanguard Institutional Index.
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 Companies Directory module to evaluate performance of over 100,000 Stocks, Funds, and ETFs against different fundamentals.

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