Correlation Between Merck and Azure Power

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

Diversification Opportunities for Merck and Azure Power

0.64
  Correlation Coefficient

Poor diversification

The 3 months correlation between Merck and Azure is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Azure Power Global in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Azure Power Global 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 Azure Power. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Azure Power Global has no effect on the direction of Merck i.e., Merck and Azure Power go up and down completely randomly.

Pair Corralation between Merck and Azure Power

Considering the 90-day investment horizon Merck Company is expected to generate 0.1 times more return on investment than Azure Power. However, Merck Company is 10.37 times less risky than Azure Power. It trades about -0.01 of its potential returns per unit of risk. Azure Power Global is currently generating about -0.21 per unit of risk. If you would invest  11,185  in Merck Company on September 6, 2024 and sell it today you would lose (1,048) from holding Merck Company or give up 9.37% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy10.91%
ValuesDaily Returns

Merck Company  vs.  Azure Power Global

 Performance 
       Timeline  
Merck Company 

Risk-Adjusted Performance

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Weak
 
Strong
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.
Azure Power Global 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days Azure Power Global has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Azure Power is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Merck and Azure Power Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Merck and Azure Power

The main advantage of trading using opposite Merck and Azure Power positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Merck position performs unexpectedly, Azure Power 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 Azure Power will offset losses from the drop in Azure Power's long position.
The idea behind Merck Company and Azure Power Global 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.

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