Correlation Between National Bank and First Merchants

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

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

Diversification Opportunities for National Bank and First Merchants

0.26

Correlation Coefficient

National Bank  First Merchants

Modest diversification

The 3 months correlation between National and First is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding National Bank Holdings and First Merchants in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Merchants and National 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 National Bank Holdings 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 National Bank i.e., National Bank and First Merchants go up and down completely randomly.

Pair Corralation between National Bank and First Merchants

Given the investment horizon of 90 days National Bank Holdings is expected to under-perform the First Merchants. But the stock apears to be less risky and, when comparing its historical volatility, National Bank Holdings is 1.12 times less risky than First Merchants. The stock trades about -0.11 of its potential returns per unit of risk. The First Merchants is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  3,968  in First Merchants on December 29, 2024 and sell it today you would earn a total of  71.00  from holding First Merchants or generate 1.79% return on investment over 90 days.

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

National Bank Holdings  vs.  First Merchants

National Bank Holdings

Risk-Adjusted Performance

Very Weak

Over the last 90 days National Bank Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unfluctuating performance, the Stock's technical indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

First Merchants

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in First Merchants are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound primary indicators, First Merchants is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with National Bank and First Merchants

The main advantage of trading using opposite National Bank and First Merchants positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if National Bank 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 National Bank Holdings 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.

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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.