Correlation Between Mereo BioPharma and Aileron Therapeutics

Can any of the company-specific risk be diversified away by investing in both Mereo BioPharma and Aileron Therapeutics 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 Mereo BioPharma and Aileron Therapeutics into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Mereo BioPharma Group and Aileron Therapeutics, you can compare the effects of market volatilities on Mereo BioPharma and Aileron Therapeutics 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 Mereo BioPharma with a short position of Aileron Therapeutics. Check out your portfolio center. Please also check ongoing floating volatility patterns of Mereo BioPharma and Aileron Therapeutics.

Diversification Opportunities for Mereo BioPharma and Aileron Therapeutics

0.27

Correlation Coefficient

Mereo BioPharma  Aileron Therapeutics

Modest diversification

The 3 months correlation between Mereo and Aileron is 0.27. Overlapping area represents the amount of risk that can be diversified away by holding Mereo BioPharma Group and Aileron Therapeutics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Aileron Therapeutics and Mereo BioPharma 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 Mereo BioPharma Group are associated (or correlated) with Aileron Therapeutics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Aileron Therapeutics has no effect on the direction of Mereo BioPharma i.e., Mereo BioPharma and Aileron Therapeutics go up and down completely randomly.

Pair Corralation between Mereo BioPharma and Aileron Therapeutics

Given the investment horizon of 90 days Mereo BioPharma is expected to generate 1.43 times less return on investment than Aileron Therapeutics. But when comparing it to its historical volatility, Mereo BioPharma Group is 2.59 times less risky than Aileron Therapeutics. It trades about 0.08 of its potential returns per unit of risk. Aileron Therapeutics is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  240.00  in Aileron Therapeutics on September 4, 2024 and sell it today you would earn a total of  45.00  from holding Aileron Therapeutics or generate 18.75% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

Mereo BioPharma Group  vs.  Aileron Therapeutics

Mereo BioPharma Group

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Mereo BioPharma Group has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of conflicting performance in the last few months, the Stock's technical and fundamental indicators remain very healthy which may send shares a bit higher in January 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Aileron Therapeutics

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Aileron Therapeutics are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of very inconsistent basic indicators, Aileron Therapeutics displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Mereo BioPharma and Aileron Therapeutics

The main advantage of trading using opposite Mereo BioPharma and Aileron Therapeutics positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Mereo BioPharma position performs unexpectedly, Aileron Therapeutics 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 Aileron Therapeutics will offset losses from the drop in Aileron Therapeutics' long position.

The idea behind Mereo BioPharma Group and Aileron Therapeutics 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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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 the Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .