Correlation Between Westamerica Bancorporation and Merchants Bancorp

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

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

Diversification Opportunities for Westamerica Bancorporation and Merchants Bancorp

-0.63

Correlation Coefficient

Westamerica Bancorporation  Merchants Bancorp

Excellent diversification

The 3 months correlation between Westamerica and Merchants is -0.63. Overlapping area represents the amount of risk that can be diversified away by holding Westamerica Bancorp. and Merchants Bancorp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merchants Bancorp and Westamerica Bancorporation 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 Westamerica Bancorporation 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 Westamerica Bancorporation i.e., Westamerica Bancorporation and Merchants Bancorp go up and down completely randomly.

Pair Corralation between Westamerica Bancorporation and Merchants Bancorp

Given the investment horizon of 90 days Westamerica Bancorporation is expected to under-perform the Merchants Bancorp. In addition to that, Westamerica Bancorporation is 2.07 times more volatile than Merchants Bancorp. It trades about -0.33 of its total potential returns per unit of risk. Merchants Bancorp is currently generating about -0.51 per unit of volatility. If you would invest  2,229  in Merchants Bancorp on September 26, 2024 and sell it today you would lose (159.00) from holding Merchants Bancorp or give up 7.13% of portfolio value over 90 days.

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

Westamerica Bancorp.  vs.  Merchants Bancorp

Westamerica Bancorporation

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Westamerica Bancorporation are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of rather conflicting fundamental drivers, Westamerica Bancorporation may actually be approaching a critical reversion point that can send shares even higher in January 2025.

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 latest weak performance, the Preferred Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Pair Trading with Westamerica Bancorporation and Merchants Bancorp

The main advantage of trading using opposite Westamerica Bancorporation and Merchants Bancorp positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Westamerica Bancorporation 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 Westamerica Bancorporation 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.