Correlation Between Community West and First Merchants

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

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

Diversification Opportunities for Community West and First Merchants

0.9

Correlation Coefficient

Community West  First Merchants

Almost no diversification

The 3 months correlation between Community and First is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Community West Bancshares and First Merchants in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Merchants and Community West 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 Community West Bancshares 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 Community West i.e., Community West and First Merchants go up and down completely randomly.

Pair Corralation between Community West and First Merchants

Given the investment horizon of 90 days Community West is expected to generate 9.87 times less return on investment than First Merchants. But when comparing it to its historical volatility, Community West Bancshares is 1.7 times less risky than First Merchants. It trades about 0.01 of its potential returns per unit of risk. First Merchants is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  3,723  in First Merchants on September 23, 2024 and sell it today you would earn a total of  366.00  from holding First Merchants or generate 9.83% return on investment over 90 days.

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

Community West Bancshares  vs.  First Merchants

Community West Bancshares

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Community West Bancshares has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental drivers, Community West is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

First Merchants

Risk-Adjusted Performance

5 of 100

Modest

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

Pair Trading with Community West and First Merchants

The main advantage of trading using opposite Community West and First Merchants positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Community West 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 Community West Bancshares 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.