Correlation Between First Merchants and Independent Bank

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

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

Diversification Opportunities for First Merchants and Independent Bank

0.57

Correlation Coefficient

First Merchants  Independent Bank

Very weak diversification

The 3 months correlation between First and Independent is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding First Merchants and Independent Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Independent Bank 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 Independent Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Independent Bank has no effect on the direction of First Merchants i.e., First Merchants and Independent Bank go up and down completely randomly.

Pair Corralation between First Merchants and Independent Bank

Given the investment horizon of 90 days First Merchants is expected to generate 1.01 times more return on investment than Independent Bank. However, First Merchants is 1.01 times more volatile than Independent Bank. It trades about 0.02 of its potential returns per unit of risk. Independent Bank is currently generating about -0.1 per unit of risk. If you would invest  4,334  in First Merchants on December 1, 2024 and sell it today you would earn a total of  46.00  from holding First Merchants or generate 1.06% return on investment over 90 days.

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

First Merchants  vs.  Independent Bank

First Merchants

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in First Merchants are ranked lower than 1 (%) 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.

Independent Bank

Risk-Adjusted Performance

Very Weak

Over the last 90 days Independent Bank has generated negative risk-adjusted returns adding no value to investors with long positions. Even with latest fragile performance, the Stock's fundamental indicators remain invariable and the latest agitation on Wall Street may also be a sign of long-running gains for the enterprise retail investors.

Pair Trading with First Merchants and Independent Bank

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

The idea behind First Merchants and Independent Bank 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.