Correlation Between Merck and Ecopetrol

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

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

Diversification Opportunities for Merck and Ecopetrol

0.49

Correlation Coefficient

Merck  Ecopetrol

Very weak diversification

The 3 months correlation between Merck and Ecopetrol is 0.49. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Ecopetrol SA ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ecopetrol SA ADR 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 Ecopetrol. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ecopetrol SA ADR has no effect on the direction of Merck i.e., Merck and Ecopetrol go up and down completely randomly.

Pair Corralation between Merck and Ecopetrol

Considering the 90-day investment horizon Merck is expected to generate 18.96 times less return on investment than Ecopetrol. But when comparing it to its historical volatility, Merck Company is 1.87 times less risky than Ecopetrol. It trades about 0.01 of its potential returns per unit of risk. Ecopetrol SA ADR is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  1,136  in Ecopetrol SA ADR on January 29, 2024 and sell it today you would earn a total of  49.00  from holding Ecopetrol SA ADR or generate 4.31% return on investment over 90 days.

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

Merck Company  vs.  Ecopetrol SA ADR

Merck Company

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite quite weak basic indicators, Merck may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Ecopetrol SA ADR

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Ecopetrol SA ADR are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, Ecopetrol is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Merck and Ecopetrol

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

The idea behind Merck Company and Ecopetrol SA ADR 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.