Correlation Between Merck and Gilead Sciences

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

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

Diversification Opportunities for Merck and Gilead Sciences

-0.66

Correlation Coefficient

Merck  Gilead Sciences

Excellent diversification

The 3 months correlation between Merck and Gilead is -0.66. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and Gilead Sciences in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Gilead Sciences 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 Gilead Sciences. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Gilead Sciences has no effect on the direction of Merck i.e., Merck and Gilead Sciences go up and down completely randomly.

Pair Corralation between Merck and Gilead Sciences

Considering the 90-day investment horizon Merck Company is expected to generate 1.36 times more return on investment than Gilead Sciences. However, Merck is 1.36 times more volatile than Gilead Sciences. It trades about 0.06 of its potential returns per unit of risk. Gilead Sciences is currently generating about -0.42 per unit of risk. If you would invest  12,531  in Merck Company on January 24, 2024 and sell it today you would earn a total of  163.00  from holding Merck Company or generate 1.3% 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.  Gilead Sciences

Merck Company

Risk-Adjusted Performance

8 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite quite unsteady basic indicators, Merck may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Gilead Sciences

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Gilead Sciences has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unfluctuating performance in the last few months, the Stock's essential indicators remain rather sound which may send shares a bit higher in May 2024. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with Merck and Gilead Sciences

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

The idea behind Merck Company and Gilead Sciences 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.