Correlation Between Merck and Santos

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

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

Diversification Opportunities for Merck and Santos

0.72

Correlation Coefficient

Merck  Santos

Poor diversification

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

Pair Corralation between Merck and Santos

Considering the 90-day investment horizon Merck Company is expected to under-perform the Santos. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 2.91 times less risky than Santos. The stock trades about -0.19 of its potential returns per unit of risk. The Santos is currently generating about -0.04 of returns per unit of risk over similar time horizon. If you would invest  476.00  in Santos on September 17, 2024 and sell it today you would lose (56.00) from holding Santos or give up 11.76% 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.  Santos

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.

Santos

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Santos has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak 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 Santos

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

The idea behind Merck Company and Santos 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.