Correlation Between Merck and Verizon Communications

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

Diversification Opportunities for Merck and Verizon Communications

0.42
  Correlation Coefficient

Very weak diversification

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

Pair Corralation between Merck and Verizon Communications

Considering the 90-day investment horizon Merck Company is expected to generate 1.27 times more return on investment than Verizon Communications. However, Merck is 1.27 times more volatile than Verizon Communications. It trades about 0.03 of its potential returns per unit of risk. Verizon Communications is currently generating about -0.03 per unit of risk. If you would invest  7,582  in Merck Company on May 12, 2022 and sell it today you would earn a total of  1,370  from holding Merck Company or generate 18.07% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthWeak
Accuracy99.8%
ValuesDaily Returns

Merck Company  vs.  Verizon Communications

 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

Verizon Communications 
Verizon Performance
0 of 100
Over the last 90 days Verizon Communications has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Verizon Communications is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Verizon Price Channel

Merck and Verizon Communications Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Merck and Verizon Communications

The main advantage of trading using opposite Merck and Verizon Communications positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Verizon Communications 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 Verizon Communications will offset losses from the drop in Verizon Communications' long position.
The idea behind Merck Company and Verizon Communications 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.
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 Commodity Channel Index module to use Commodity Channel Index to analyze current equity momentum.

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