Correlation Between First Merchants and Dime Community

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

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

Diversification Opportunities for First Merchants and Dime Community

0.62

Correlation Coefficient

First Merchants  Dime Community

Poor diversification

The 3 months correlation between First and Dime is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding First Merchants and Dime Community Bancshares in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Dime Community Bancshares 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 Dime Community. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Dime Community Bancshares has no effect on the direction of First Merchants i.e., First Merchants and Dime Community go up and down completely randomly.

Pair Corralation between First Merchants and Dime Community

Assuming the 90 days horizon First Merchants is expected to generate 6.14 times less return on investment than Dime Community. But when comparing it to its historical volatility, First Merchants is 5.51 times less risky than Dime Community. It trades about 0.07 of its potential returns per unit of risk. Dime Community Bancshares is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  2,737  in Dime Community Bancshares on October 8, 2024 and sell it today you would earn a total of  352.00  from holding Dime Community Bancshares or generate 12.86% return on investment over 90 days.

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

First Merchants  vs.  Dime Community Bancshares

First Merchants

Risk-Adjusted Performance

5 of 100

OK

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. Even with relatively invariable technical and fundamental indicators, First Merchants is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Dime Community Bancshares

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Dime Community Bancshares are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of very weak basic indicators, Dime Community displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with First Merchants and Dime Community

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

The idea behind First Merchants and Dime Community Bancshares 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.