Correlation Between AIB Group and Merchants Bancorp

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

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

Diversification Opportunities for AIB Group and Merchants Bancorp

0.2

Correlation Coefficient

AIB Group  Merchants Bancorp

Modest diversification

The 3 months correlation between AIB and Merchants is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding AIB Group plc and Merchants Bancorp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merchants Bancorp and AIB Group 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 AIB Group plc are associated (or correlated) with Merchants Bancorp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Merchants Bancorp has no effect on the direction of AIB Group i.e., AIB Group and Merchants Bancorp go up and down completely randomly.

Pair Corralation between AIB Group and Merchants Bancorp

Assuming the 90 days horizon AIB Group plc is expected to under-perform the Merchants Bancorp. But the pink sheet apears to be less risky and, when comparing its historical volatility, AIB Group plc is 1.22 times less risky than Merchants Bancorp. The pink sheet trades about -0.19 of its potential returns per unit of risk. The Merchants Bancorp is currently generating about -0.13 of returns per unit of risk over similar time horizon. If you would invest  3,810  in Merchants Bancorp on September 21, 2024 and sell it today you would lose (195.00) from holding Merchants Bancorp or give up 5.12% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.45%
Values	Daily Returns

AIB Group plc  vs.  Merchants Bancorp

AIB Group plc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days AIB Group plc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unsteady performance, the Stock's technical and fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Merchants Bancorp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Merchants Bancorp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Stock's forward indicators remain very healthy which may send shares a bit higher in January 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Pair Trading with AIB Group and Merchants Bancorp

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

The idea behind AIB Group plc and Merchants Bancorp 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 Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.