Correlation Between Merck and Magazine Luiza

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

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

Diversification Opportunities for Merck and Magazine Luiza

0.85

Correlation Coefficient

Merck  Magazine Luiza

Very poor diversification

The 3 months correlation between Merck and Magazine is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Magazine Luiza SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Magazine Luiza SA 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 Magazine Luiza. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Magazine Luiza SA has no effect on the direction of Merck i.e., Merck and Magazine Luiza go up and down completely randomly.

Pair Corralation between Merck and Magazine Luiza

Considering the 90-day investment horizon Merck Company is expected to generate 0.38 times more return on investment than Magazine Luiza. However, Merck Company is 2.62 times less risky than Magazine Luiza. It trades about -0.2 of its potential returns per unit of risk. Magazine Luiza SA is currently generating about -0.12 per unit of risk. If you would invest  11,770  in Merck Company on September 18, 2024 and sell it today you would lose (1,761) from holding Merck Company or give up 14.96% of portfolio value over 90 days.

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

Merck Company  vs.  Magazine Luiza SA

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 uncertain 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.

Magazine Luiza SA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Magazine Luiza SA 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 basic indicators remain fairly strong which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with Merck and Magazine Luiza

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

The idea behind Merck Company and Magazine Luiza SA 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.