Correlation Between Merit Medical and Insteel Industries

Can any of the company-specific risk be diversified away by investing in both Merit Medical and Insteel Industries 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 Merit Medical and Insteel Industries into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Merit Medical Systems and Insteel Industries, you can compare the effects of market volatilities on Merit Medical and Insteel Industries 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 Merit Medical with a short position of Insteel Industries. Check out your portfolio center. Please also check ongoing floating volatility patterns of Merit Medical and Insteel Industries.

Diversification Opportunities for Merit Medical and Insteel Industries

0.63

Correlation Coefficient

Merit Medical  Insteel Industries

Poor diversification

The 3 months correlation between Merit and Insteel is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Merit Medical Systems and Insteel Industries in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Insteel Industries and Merit Medical 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 Merit Medical Systems are associated (or correlated) with Insteel Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Insteel Industries has no effect on the direction of Merit Medical i.e., Merit Medical and Insteel Industries go up and down completely randomly.

Pair Corralation between Merit Medical and Insteel Industries

Given the investment horizon of 90 days Merit Medical Systems is expected to generate 0.65 times more return on investment than Insteel Industries. However, Merit Medical Systems is 1.55 times less risky than Insteel Industries. It trades about -0.01 of its potential returns per unit of risk. Insteel Industries is currently generating about -0.04 per unit of risk. If you would invest  10,482  in Merit Medical Systems on December 3, 2024 and sell it today you would lose (179.00) from holding Merit Medical Systems or give up 1.71% of portfolio value over 90 days.

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

Merit Medical Systems  vs.  Insteel Industries

Merit Medical Systems

Risk-Adjusted Performance

Very Weak

Over the last 90 days Merit Medical Systems has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong basic indicators, Merit Medical is not utilizing all of its potentials. The current stock price confusion, may contribute to short-horizon losses for the traders.

Insteel Industries

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Merit Medical and Insteel Industries

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

The idea behind Merit Medical Systems and Insteel Industries 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.