Correlation Between Merck and WisdomTree SmallCap

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

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

Diversification Opportunities for Merck and WisdomTree SmallCap

-0.37

Correlation Coefficient

Merck  WisdomTree SmallCap

Very good diversification

The 3 months correlation between Merck and WisdomTree is -0.37. Overlapping area represents the amount of risk that can be diversified away by holding Merck Company and WisdomTree SmallCap Quality in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on WisdomTree SmallCap 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 WisdomTree SmallCap. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of WisdomTree SmallCap has no effect on the direction of Merck i.e., Merck and WisdomTree SmallCap go up and down completely randomly.

Pair Corralation between Merck and WisdomTree SmallCap

Considering the 90-day investment horizon Merck Company is expected to generate 1.73 times more return on investment than WisdomTree SmallCap. However, Merck is 1.73 times more volatile than WisdomTree SmallCap Quality. It trades about 0.2 of its potential returns per unit of risk. WisdomTree SmallCap Quality is currently generating about 0.02 per unit of risk. If you would invest  8,330  in Merck Company on August 29, 2025 and sell it today you would earn a total of  2,236  from holding Merck Company or generate 26.84% return on investment over 90 days.

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

Merck Company  vs.  WisdomTree SmallCap Quality

Merck Company

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Merck Company are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite quite weak basic indicators, Merck disclosed solid returns over the last few months and may actually be approaching a breakup point.

WisdomTree SmallCap

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in WisdomTree SmallCap Quality are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent primary indicators, WisdomTree SmallCap is not utilizing all of its potentials. The current stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with Merck and WisdomTree SmallCap

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

The idea behind Merck Company and WisdomTree SmallCap Quality 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.