Correlation Between First Merchants and Home Bancorp

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

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

Diversification Opportunities for First Merchants and Home Bancorp

0.86

Correlation Coefficient

First Merchants  Home Bancorp

Very poor diversification

The 3 months correlation between First and Home is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding First Merchants and Home Bancorp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Home Bancorp and First Merchants 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 First Merchants are associated (or correlated) with Home Bancorp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Home Bancorp has no effect on the direction of First Merchants i.e., First Merchants and Home Bancorp go up and down completely randomly.

Pair Corralation between First Merchants and Home Bancorp

Given the investment horizon of 90 days First Merchants is expected to generate 0.87 times more return on investment than Home Bancorp. However, First Merchants is 1.14 times less risky than Home Bancorp. It trades about 0.04 of its potential returns per unit of risk. Home Bancorp is currently generating about 0.01 per unit of risk. If you would invest  3,991  in First Merchants on December 27, 2024 and sell it today you would earn a total of  116.00  from holding First Merchants or generate 2.91% return on investment over 90 days.

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

First Merchants  vs.  Home Bancorp

First Merchants

Risk-Adjusted Performance

Weak

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

Home Bancorp

Risk-Adjusted Performance

Very Weak

Over the last 90 days Home Bancorp has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable fundamental indicators, Home Bancorp is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with First Merchants and Home Bancorp

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

The idea behind First Merchants and Home 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 Sign In To Macroaxis module to sign in to explore Macroaxis' wealth optimization platform and fintech modules.