Correlation Between Oracle and Merchants Bancorp

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

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

Diversification Opportunities for Oracle and Merchants Bancorp

0.65

Correlation Coefficient

Oracle  Merchants Bancorp

Poor diversification

The 3 months correlation between Oracle and Merchants is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding Oracle and Merchants Bancorp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merchants Bancorp and Oracle 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 Oracle are associated (or correlated) with Merchants Bancorp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Merchants Bancorp has no effect on the direction of Oracle i.e., Oracle and Merchants Bancorp go up and down completely randomly.

Pair Corralation between Oracle and Merchants Bancorp

Given the investment horizon of 90 days Oracle is expected to generate 2.73 times more return on investment than Merchants Bancorp. However, Oracle is 2.73 times more volatile than Merchants Bancorp. It trades about 0.22 of its potential returns per unit of risk. Merchants Bancorp is currently generating about 0.07 per unit of risk. If you would invest  13,919  in Oracle on September 3, 2024 and sell it today you would earn a total of  4,565  from holding Oracle or generate 32.8% return on investment over 90 days.

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

Oracle  vs.  Merchants Bancorp

Oracle

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Oracle are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite quite abnormal fundamental indicators, Oracle disclosed solid returns over the last few months and may actually be approaching a breakup point.

Merchants Bancorp

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Merchants Bancorp are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Merchants Bancorp is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Oracle and Merchants Bancorp

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

The idea behind Oracle and Merchants 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.

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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.