Correlation Between Home Federal and First Merchants

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

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

Diversification Opportunities for Home Federal and First Merchants

-0.05

Correlation Coefficient

Home Federal  First Merchants

Good diversification

The 3 months correlation between Home and First is -0.05. Overlapping area represents the amount of risk that can be diversified away by holding Home Federal Bancorp and First Merchants in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Merchants and Home Federal 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 Home Federal Bancorp are associated (or correlated) with First Merchants. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Merchants has no effect on the direction of Home Federal i.e., Home Federal and First Merchants go up and down completely randomly.

Pair Corralation between Home Federal and First Merchants

Given the investment horizon of 90 days Home Federal Bancorp is expected to generate 1.31 times more return on investment than First Merchants. However, Home Federal is 1.31 times more volatile than First Merchants. It trades about 0.09 of its potential returns per unit of risk. First Merchants is currently generating about -0.17 per unit of risk. If you would invest  1,240  in Home Federal Bancorp on September 23, 2024 and sell it today you would earn a total of  49.00  from holding Home Federal Bancorp or generate 3.95% return on investment over 90 days.

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

Home Federal Bancorp  vs.  First Merchants

Home Federal Bancorp

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Home Federal Bancorp are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent fundamental drivers, Home Federal is not utilizing all of its potentials. The current stock price mess, may contribute to short-term losses for the institutional investors.

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 conflicting primary indicators, First Merchants may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Home Federal and First Merchants

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

The idea behind Home Federal Bancorp and First Merchants 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.