Correlation Between Lake Shore and Mercantile Bank

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

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

Diversification Opportunities for Lake Shore and Mercantile Bank

0.34

Correlation Coefficient

Lake Shore  Mercantile Bank

Weak diversification

The 3 months correlation between Lake and Mercantile is 0.34. Overlapping area represents the amount of risk that can be diversified away by holding Lake Shore Bancorp and Mercantile Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mercantile Bank and Lake Shore 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 Lake Shore Bancorp are associated (or correlated) with Mercantile Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mercantile Bank has no effect on the direction of Lake Shore i.e., Lake Shore and Mercantile Bank go up and down completely randomly.

Pair Corralation between Lake Shore and Mercantile Bank

Given the investment horizon of 90 days Lake Shore Bancorp is expected to generate 1.56 times more return on investment than Mercantile Bank. However, Lake Shore is 1.56 times more volatile than Mercantile Bank. It trades about 0.11 of its potential returns per unit of risk. Mercantile Bank is currently generating about 0.0 per unit of risk. If you would invest  1,358  in Lake Shore Bancorp on December 29, 2024 and sell it today you would earn a total of  254.00  from holding Lake Shore Bancorp or generate 18.7% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	93.44%
Values	Daily Returns

Lake Shore Bancorp  vs.  Mercantile Bank

Lake Shore Bancorp

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Lake Shore Bancorp are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite quite weak fundamental drivers, Lake Shore disclosed solid returns over the last few months and may actually be approaching a breakup point.

Mercantile Bank

Risk-Adjusted Performance

Very Weak

Over the last 90 days Mercantile Bank has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, Mercantile Bank is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Lake Shore and Mercantile Bank

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

The idea behind Lake Shore Bancorp and Mercantile 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 Top Crypto Exchanges module to search and analyze digital assets across top global cryptocurrency exchanges.