Correlation Between PennyMac Finl and Merchants Bancorp

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

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

Diversification Opportunities for PennyMac Finl and Merchants Bancorp

0.67

Correlation Coefficient

PennyMac Finl  Merchants Bancorp

Poor diversification

The 3 months correlation between PennyMac and Merchants is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding PennyMac Finl Svcs and Merchants Bancorp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merchants Bancorp and PennyMac Finl 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 PennyMac Finl Svcs 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 PennyMac Finl i.e., PennyMac Finl and Merchants Bancorp go up and down completely randomly.

Pair Corralation between PennyMac Finl and Merchants Bancorp

Given the investment horizon of 90 days PennyMac Finl Svcs is expected to generate 0.84 times more return on investment than Merchants Bancorp. However, PennyMac Finl Svcs is 1.2 times less risky than Merchants Bancorp. It trades about -0.02 of its potential returns per unit of risk. Merchants Bancorp is currently generating about -0.13 per unit of risk. If you would invest  10,272  in PennyMac Finl Svcs on September 21, 2024 and sell it today you would lose (70.50) from holding PennyMac Finl Svcs or give up 0.69% of portfolio value over 90 days.

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

PennyMac Finl Svcs  vs.  Merchants Bancorp

PennyMac Finl Svcs

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days PennyMac Finl Svcs has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest uncertain performance, the Stock's basic indicators remain strong and the recent confusion on Wall Street may also be a sign of long-lasting gains for the firm traders.

Merchants Bancorp

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Merchants Bancorp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Stock's forward indicators remain very healthy which may send shares a bit higher in January 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Pair Trading with PennyMac Finl and Merchants Bancorp

The main advantage of trading using opposite PennyMac Finl and Merchants Bancorp positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if PennyMac Finl 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 PennyMac Finl Svcs 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.

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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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..