Correlation Between Merck and COMMONWEALTH

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

By analyzing existing cross correlation between Merck Company and COMMONWEALTH EDISON 47, you can compare the effects of market volatilities on Merck and COMMONWEALTH 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 COMMONWEALTH. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and COMMONWEALTH.

Diversification Opportunities for Merck and COMMONWEALTH

-0.5

Correlation Coefficient

Merck  COMMONWEALTH

Very good diversification

The 3 months correlation between Merck and COMMONWEALTH is -0.5. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and COMMONWEALTH EDISON 47 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on COMMONWEALTH EDISON 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 COMMONWEALTH. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of COMMONWEALTH EDISON has no effect on the direction of Merck i.e., Merck and COMMONWEALTH go up and down completely randomly.

Pair Corralation between Merck and COMMONWEALTH

Considering the 90-day investment horizon Merck Company is expected to generate 1.11 times more return on investment than COMMONWEALTH. However, Merck is 1.11 times more volatile than COMMONWEALTH EDISON 47. It trades about -0.16 of its potential returns per unit of risk. COMMONWEALTH EDISON 47 is currently generating about -0.2 per unit of risk. If you would invest  11,448  in Merck Company on September 12, 2024 and sell it today you would lose (1,348) from holding Merck Company or give up 11.77% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	42.86%
Values	Daily Returns

Merck Company  vs.  COMMONWEALTH EDISON 47

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 weak 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.

COMMONWEALTH EDISON

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days COMMONWEALTH EDISON 47 has generated negative risk-adjusted returns adding no value to investors with long positions. Despite unfluctuating performance in the last few months, the Bond's basic indicators remain somewhat 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 COMMONWEALTH EDISON 47 investors.

Pair Trading with Merck and COMMONWEALTH

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

The idea behind Merck Company and COMMONWEALTH EDISON 47 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.