Correlation Between Merck and Technology Select

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

Diversification Opportunities for Merck and Technology Select

0.23
  Correlation Coefficient

Modest diversification

The 3 months correlation between Merck and Technology is 0.23. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Technology Select Sector in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Technology Select Sector 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 Technology Select. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Technology Select Sector has no effect on the direction of Merck i.e., Merck and Technology Select go up and down completely randomly.

Pair Corralation between Merck and Technology Select

Considering the 90-day investment horizon Merck Company is expected to generate 0.55 times more return on investment than Technology Select. However, Merck Company is 1.81 times less risky than Technology Select. It trades about 0.39 of its potential returns per unit of risk. Technology Select Sector is currently generating about 0.08 per unit of risk. If you would invest  8,839  in Merck Company on September 4, 2022 and sell it today you would earn a total of  2,165  from holding Merck Company or generate 24.49% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Weak
Accuracy100.0%
ValuesDaily Returns

Merck Company  vs.  Technology Select Sector

 Performance (%) 
       Timeline  
Merck Company 
Merck Performance
23 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 23 (%) of all global equities and portfolios over the last 90 days. Despite fairly weak basic indicators, Merck demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Merck Price Channel

Technology Select Sector 
Technology Performance
2 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Technology Select Sector are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong essential indicators, Technology Select is not utilizing all of its potentials. The latest stock price confusion, may contribute to short-horizon losses for the traders.

Technology Price Channel

Merck and Technology Select Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Merck and Technology Select

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