Correlation Between Valaris and Merck

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

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

Diversification Opportunities for Valaris and Merck

0.8

Correlation Coefficient

Valaris  Merck

Very poor diversification

The 3 months correlation between Valaris and Merck is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Valaris and Merck Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merck Company and Valaris 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 Valaris are associated (or correlated) with Merck. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Merck Company has no effect on the direction of Valaris i.e., Valaris and Merck go up and down completely randomly.

Pair Corralation between Valaris and Merck

Considering the 90-day investment horizon Valaris is expected to under-perform the Merck. In addition to that, Valaris is 2.14 times more volatile than Merck Company. It trades about -0.1 of its total potential returns per unit of risk. Merck Company is currently generating about -0.16 per unit of volatility. 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 Together
Strength	Strong
Accuracy	100.0%
Values	Daily Returns

Valaris  vs.  Merck Company

Valaris

Risk-Adjusted Performance

0 of 100

Very Weak

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

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.

Pair Trading with Valaris and Merck

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

The idea behind Valaris and Merck Company 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..