Correlation Between Mercantile Bank and Lake Shore

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

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

Diversification Opportunities for Mercantile Bank and Lake Shore

0.34

Correlation Coefficient

Mercantile Bank  Lake Shore

Weak diversification

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

Pair Corralation between Mercantile Bank and Lake Shore

Given the investment horizon of 90 days Mercantile Bank is expected to generate 45.65 times less return on investment than Lake Shore. But when comparing it to its historical volatility, Mercantile Bank is 1.56 times less risky than Lake Shore. It trades about 0.0 of its potential returns per unit of risk. Lake Shore Bancorp is currently generating about 0.11 of returns per unit of risk over similar time horizon. 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

Mercantile Bank  vs.  Lake Shore 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.

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.

Pair Trading with Mercantile Bank and Lake Shore

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

The idea behind Mercantile Bank and Lake Shore 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.