Correlation Between Grand River and Southern Michigan

Can any of the company-specific risk be diversified away by investing in both Grand River and Southern Michigan 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 Grand River and Southern Michigan into the same portfolio, which is an essential part of the fundamental portfolio management process.

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

Diversification Opportunities for Grand River and Southern Michigan

0.35

Correlation Coefficient

Grand River  Southern Michigan

Weak diversification

The 3 months correlation between Grand and Southern is 0.35. Overlapping area represents the amount of risk that can be diversified away by holding Grand River Commerce and Southern Michigan Bancorp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Southern Michigan Bancorp and Grand River 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 Grand River Commerce are associated (or correlated) with Southern Michigan. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Southern Michigan Bancorp has no effect on the direction of Grand River i.e., Grand River and Southern Michigan go up and down completely randomly.

Pair Corralation between Grand River and Southern Michigan

Given the investment horizon of 90 days Grand River Commerce is expected to generate 3.5 times more return on investment than Southern Michigan. However, Grand River is 3.5 times more volatile than Southern Michigan Bancorp. It trades about 0.23 of its potential returns per unit of risk. Southern Michigan Bancorp is currently generating about -0.04 per unit of risk. If you would invest  310.00  in Grand River Commerce on December 4, 2024 and sell it today you would earn a total of  90.00  from holding Grand River Commerce or generate 29.03% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	81.36%
Values	Daily Returns

Grand River Commerce  vs.  Southern Michigan Bancorp

Grand River Commerce

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Grand River Commerce are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile basic indicators, Grand River showed solid returns over the last few months and may actually be approaching a breakup point.

Southern Michigan Bancorp

Risk-Adjusted Performance

Very Weak

Over the last 90 days Southern Michigan Bancorp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound primary indicators, Southern Michigan is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Grand River and Southern Michigan

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

The idea behind Grand River Commerce and Southern Michigan 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 Latest Portfolios module to quick portfolio dashboard that showcases your latest portfolios.