Correlation Between Technology Select and Merck

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

Diversification Opportunities for Technology Select and Merck

0.29
  Correlation Coefficient

Modest diversification

The 3 months correlation between Technology and Merck is 0.29. Overlapping area represents the amount of risk that can be diversified away by holding Technology Select Sector and Merck Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck Company and Technology Select 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 Technology Select Sector 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 Technology Select i.e., Technology Select and Merck go up and down completely randomly.

Pair Corralation between Technology Select and Merck

Considering the 90-day investment horizon Technology Select is expected to generate 3.63 times less return on investment than Merck. In addition to that, Technology Select is 1.22 times more volatile than Merck Company. It trades about 0.02 of its total potential returns per unit of risk. Merck Company is currently generating about 0.07 per unit of volatility. If you would invest  7,169  in Merck Company on September 7, 2022 and sell it today you would earn a total of  3,721  from holding Merck Company or generate 51.9% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Weak
Accuracy99.8%
ValuesDaily Returns

Technology Select Sector  vs.  Merck Company

 Performance (%) 
       Timeline  
Technology Select Sector 
Technology Performance
0 of 100
Over the last 90 days Technology Select Sector has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong essential indicators, Technology Select is not utilizing all of its potentials. The current stock price confusion, may contribute to short-horizon losses for the traders.

Technology Price Channel

Merck Company 
Merck Performance
22 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 22 (%) 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 and Merck Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Technology Select and Merck

The main advantage of trading using opposite Technology Select and Merck positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Technology Select 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.
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 Technology Select 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. Technology Select'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, Technology Select'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 Technology Select Sector.
The idea behind Technology Select Sector 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..

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