Correlation Between Merck and EFFECTOR Therapeutics

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

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

Diversification Opportunities for Merck and EFFECTOR Therapeutics

0.72

Correlation Coefficient

Merck  EFFECTOR Therapeutics

Poor diversification

The 3 months correlation between Merck and EFFECTOR is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and EFFECTOR Therapeutics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on EFFECTOR Therapeutics 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 EFFECTOR Therapeutics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of EFFECTOR Therapeutics has no effect on the direction of Merck i.e., Merck and EFFECTOR Therapeutics go up and down completely randomly.

Pair Corralation between Merck and EFFECTOR Therapeutics

If you would invest  0.10  in EFFECTOR Therapeutics on September 3, 2024 and sell it today you would earn a total of  0.00  from holding EFFECTOR Therapeutics or generate 0.0% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	1.56%
Values	Daily Returns

Merck Company  vs.  EFFECTOR Therapeutics

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 latest unsteady performance, the Stock's basic indicators remain persistent and the latest mess on Wall Street may also be a sign of long-standing gains for the company institutional investors.

EFFECTOR Therapeutics

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days EFFECTOR Therapeutics has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, EFFECTOR Therapeutics is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Merck and EFFECTOR Therapeutics

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

The idea behind Merck Company and EFFECTOR 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..