Correlation Between Merck and Pine Cliff

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

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

Diversification Opportunities for Merck and Pine Cliff

0.72

Correlation Coefficient

Merck  Pine Cliff

Poor diversification

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

Pair Corralation between Merck and Pine Cliff

Considering the 90-day investment horizon Merck Company is expected to under-perform the Pine Cliff. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 2.65 times less risky than Pine Cliff. The stock trades about -0.16 of its potential returns per unit of risk. The Pine Cliff Energy is currently generating about -0.04 of returns per unit of risk over similar time horizon. If you would invest  71.00  in Pine Cliff Energy on August 31, 2024 and sell it today you would lose (8.00) from holding Pine Cliff Energy or give up 11.27% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.46%
Values	Daily Returns

Merck Company  vs.  Pine Cliff Energy

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 abnormal 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.

Pine Cliff Energy

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Pine Cliff Energy has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with Merck and Pine Cliff

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

The idea behind Merck Company and Pine Cliff Energy 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.