Correlation Between Merck and United Therapeutics

Can any of the company-specific risk be diversified away by investing in both Merck and United 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 United 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 United Therapeutics, you can compare the effects of market volatilities on Merck and United 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 United Therapeutics. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merck and United Therapeutics.

Diversification Opportunities for Merck and United Therapeutics

-0.65

Correlation Coefficient

Merck  United Therapeutics

Excellent diversification

The 3 months correlation between Merck and United is -0.65. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and United Therapeutics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on United 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 United Therapeutics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of United Therapeutics has no effect on the direction of Merck i.e., Merck and United Therapeutics go up and down completely randomly.

Pair Corralation between Merck and United Therapeutics

Considering the 90-day investment horizon Merck Company is expected to under-perform the United Therapeutics. But the stock apears to be less risky and, when comparing its historical volatility, Merck Company is 1.41 times less risky than United Therapeutics. The stock trades about -0.15 of its potential returns per unit of risk. The United Therapeutics is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  35,240  in United Therapeutics on August 31, 2024 and sell it today you would earn a total of  2,573  from holding United Therapeutics or generate 7.3% return on investment over 90 days.

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

Merck Company  vs.  United 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 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.

United Therapeutics

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in United Therapeutics are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak technical indicators, United Therapeutics may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Merck and United Therapeutics

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

The idea behind Merck Company and United 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..