Correlation Between Merck and Johnson Johnson

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

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

Diversification Opportunities for Merck and Johnson Johnson

0.88

Correlation Coefficient

Merck  Johnson Johnson

Very poor diversification

The 3 months correlation between Merck and Johnson is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Johnson Johnson Co in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Johnson Johnson 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 Johnson Johnson. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Johnson Johnson has no effect on the direction of Merck i.e., Merck and Johnson Johnson go up and down completely randomly.

Pair Corralation between Merck and Johnson Johnson

Assuming the 90 days trading horizon Merck is expected to generate 1.26 times less return on investment than Johnson Johnson. In addition to that, Merck is 1.53 times more volatile than Johnson Johnson Co. It trades about 0.08 of its total potential returns per unit of risk. Johnson Johnson Co is currently generating about 0.15 per unit of volatility. If you would invest  1,240,000  in Johnson Johnson Co on April 24, 2025 and sell it today you would earn a total of  175,000  from holding Johnson Johnson Co or generate 14.11% return on investment over 90 days.

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

Merck Company  vs.  Johnson Johnson Co

Merck Company

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak forward-looking signals, Merck may actually be approaching a critical reversion point that can send shares even higher in August 2025.

Johnson Johnson

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Johnson Johnson Co are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak forward-looking indicators, Johnson Johnson sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Merck and Johnson Johnson

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

The idea behind Merck Company and Johnson Johnson Co 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 Anywhere module to track or share privately all of your investments from the convenience of any device.