Correlation Between Prime Meridian and Mainstreet Bank

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

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

Diversification Opportunities for Prime Meridian and Mainstreet Bank

0.55

Correlation Coefficient

Prime Meridian  Mainstreet Bank

Very weak diversification

The 3 months correlation between Prime and Mainstreet is 0.55. Overlapping area represents the amount of risk that can be diversified away by holding Prime Meridian Holding and Mainstreet Bank in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Mainstreet Bank and Prime Meridian 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 Prime Meridian Holding are associated (or correlated) with Mainstreet Bank. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Mainstreet Bank has no effect on the direction of Prime Meridian i.e., Prime Meridian and Mainstreet Bank go up and down completely randomly.

Pair Corralation between Prime Meridian and Mainstreet Bank

Given the investment horizon of 90 days Prime Meridian Holding is expected to generate 1.17 times more return on investment than Mainstreet Bank. However, Prime Meridian is 1.17 times more volatile than Mainstreet Bank. It trades about 0.02 of its potential returns per unit of risk. Mainstreet Bank is currently generating about -0.1 per unit of risk. If you would invest  2,801  in Prime Meridian Holding on December 1, 2024 and sell it today you would earn a total of  49.00  from holding Prime Meridian Holding or generate 1.75% return on investment over 90 days.

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

Prime Meridian Holding  vs.  Mainstreet Bank

Prime Meridian Holding

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Prime Meridian Holding are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable technical indicators, Prime Meridian is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Mainstreet Bank

Risk-Adjusted Performance

Very Weak

Over the last 90 days Mainstreet Bank has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with Prime Meridian and Mainstreet Bank

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

The idea behind Prime Meridian Holding and Mainstreet Bank 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.