Correlation Between Merck and AGCO

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

By analyzing existing cross correlation between Merck Company and AGCO Corporation, you can compare the effects of market volatilities on Merck and AGCO 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 AGCO. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and AGCO.

Diversification Opportunities for Merck and AGCO

-0.3

Correlation Coefficient

Merck  AGCO

Very good diversification

The 3 months correlation between Merck and AGCO is -0.3. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and AGCO Corp. in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AGCO 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 AGCO. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AGCO has no effect on the direction of Merck i.e., Merck and AGCO go up and down completely randomly.

Pair Corralation between Merck and AGCO

Considering the 90-day investment horizon Merck Company is expected to under-perform the AGCO. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 1.62 times less risky than AGCO. The stock trades about -0.17 of its potential returns per unit of risk. The AGCO Corporation is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  8,930  in AGCO Corporation on September 4, 2024 and sell it today you would earn a total of  1,220  from holding AGCO Corporation or generate 13.66% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	100.0%
Values	Daily Returns

Merck Company  vs.  AGCO Corp.

Merck Company

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Merck Company has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain quite persistent which may send shares a bit higher in January 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

AGCO

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in AGCO Corporation are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of very weak fundamental indicators, AGCO displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck and AGCO

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

The idea behind Merck Company and AGCO Corporation 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 the Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.