Correlation Between Mercantile Bank and Home Bancorp

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

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

Diversification Opportunities for Mercantile Bank and Home Bancorp

0.9

Correlation Coefficient

Mercantile Bank  Home Bancorp

Almost no diversification

The 3 months correlation between Mercantile and Home is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Mercantile Bank and Home Bancorp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Home Bancorp and Mercantile Bank 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 Mercantile Bank are associated (or correlated) with Home Bancorp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Home Bancorp has no effect on the direction of Mercantile Bank i.e., Mercantile Bank and Home Bancorp go up and down completely randomly.

Pair Corralation between Mercantile Bank and Home Bancorp

Given the investment horizon of 90 days Mercantile Bank is expected to generate 1.06 times more return on investment than Home Bancorp. However, Mercantile Bank is 1.06 times more volatile than Home Bancorp. It trades about 0.0 of its potential returns per unit of risk. Home Bancorp is currently generating about 0.0 per unit of risk. If you would invest  4,519  in Mercantile Bank on December 26, 2024 and sell it today you would lose (39.00) from holding Mercantile Bank or give up 0.86% of portfolio value over 90 days.

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

Mercantile Bank  vs.  Home Bancorp

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.

Home Bancorp

Risk-Adjusted Performance

Very Weak

Over the last 90 days Home Bancorp has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable fundamental indicators, Home Bancorp is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Mercantile Bank and Home Bancorp

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

The idea behind Mercantile Bank and Home 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.