Correlation Between Capital One and Merchants Bancorp

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

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

Diversification Opportunities for Capital One and Merchants Bancorp

0.82

Correlation Coefficient

Capital One  Merchants Bancorp

Very poor diversification

The 3 months correlation between Capital and Merchants is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Capital One Financial and Merchants Bancorp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merchants Bancorp and Capital One 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 Capital One Financial 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 Capital One i.e., Capital One and Merchants Bancorp go up and down completely randomly.

Pair Corralation between Capital One and Merchants Bancorp

Assuming the 90 days trading horizon Capital One Financial is expected to generate 0.91 times more return on investment than Merchants Bancorp. However, Capital One Financial is 1.1 times less risky than Merchants Bancorp. It trades about -0.01 of its potential returns per unit of risk. Merchants Bancorp is currently generating about -0.02 per unit of risk. If you would invest  2,021  in Capital One Financial on December 1, 2024 and sell it today you would lose (19.00) from holding Capital One Financial or give up 0.94% of portfolio value over 90 days.

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

Capital One Financial  vs.  Merchants Bancorp

Capital One Financial

Risk-Adjusted Performance

Very Weak

Over the last 90 days Capital One Financial has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong technical and fundamental indicators, Capital One is not utilizing all of its potentials. The new stock price confusion, may contribute to short-horizon losses for the traders.

Merchants Bancorp

Risk-Adjusted Performance

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 very healthy basic indicators, Merchants Bancorp is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Capital One and Merchants Bancorp

The main advantage of trading using opposite Capital One and Merchants Bancorp positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Capital One 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 Capital One Financial 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.

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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.