Correlation Between First Merchants and Community Financial

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

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

Diversification Opportunities for First Merchants and Community Financial

-0.67

Correlation Coefficient

First Merchants  Community Financial

Excellent diversification

The 3 months correlation between First and Community is -0.67. Overlapping area represents the amount of risk that can be diversified away by holding First Merchants and Community Financial Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Community Financial Corp 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 Community Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Community Financial Corp has no effect on the direction of First Merchants i.e., First Merchants and Community Financial go up and down completely randomly.

Pair Corralation between First Merchants and Community Financial

Given the investment horizon of 90 days First Merchants is expected to generate 1.07 times more return on investment than Community Financial. However, First Merchants is 1.07 times more volatile than Community Financial Corp. It trades about 0.02 of its potential returns per unit of risk. Community Financial Corp is currently generating about -0.14 per unit of risk. If you would invest  3,835  in First Merchants on September 30, 2024 and sell it today you would earn a total of  190.00  from holding First Merchants or generate 4.95% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	24.35%
Values	Daily Returns

First Merchants  vs.  Community Financial Corp

First Merchants

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in First Merchants are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak primary indicators, First Merchants may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Community Financial Corp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Community Financial Corp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, Community Financial is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with First Merchants and Community Financial

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

The idea behind First Merchants and Community Financial Corp 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 Bonds Directory module to find actively traded corporate debentures issued by US companies.