Correlation Between Sigma Lithium and Merck

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

Diversification Opportunities for Sigma Lithium and Merck

0.7
  Correlation Coefficient

Poor diversification

The 3 months correlation between Sigma and Merck is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Sigma Lithium Resources and Merck Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck Company and Sigma Lithium 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 Sigma Lithium Resources are associated (or correlated) with Merck. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Merck Company has no effect on the direction of Sigma Lithium i.e., Sigma Lithium and Merck go up and down completely randomly.

Pair Corralation between Sigma Lithium and Merck

Given the investment horizon of 90 days Sigma Lithium is expected to generate 2.41 times less return on investment than Merck. In addition to that, Sigma Lithium is 3.24 times more volatile than Merck Company. It trades about 0.05 of its total potential returns per unit of risk. Merck Company is currently generating about 0.36 per unit of volatility. If you would invest  9,940  in Merck Company on September 3, 2022 and sell it today you would earn a total of  1,064  from holding Merck Company or generate 10.7% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Sigma Lithium Resources  vs.  Merck Company

 Performance (%) 
       Timeline  
Sigma Lithium Resources 
Sigma Performance
13 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Sigma Lithium Resources are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Even with relatively conflicting primary indicators, Sigma Lithium revealed solid returns over the last few months and may actually be approaching a breakup point.

Sigma Price Channel

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 conflicting basic indicators, Merck demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Merck Price Channel

Sigma Lithium and Merck Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Sigma Lithium and Merck

The main advantage of trading using opposite Sigma Lithium and Merck positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Sigma Lithium position performs unexpectedly, Merck 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 Merck will offset losses from the drop in Merck's long position.
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The idea behind Sigma Lithium Resources and Merck Company 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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.

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