Correlation Between First Merchants and Continental

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

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

Diversification Opportunities for First Merchants and Continental

0.55

Correlation Coefficient

First Merchants  Continental

Very weak diversification

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

Pair Corralation between First Merchants and Continental

Given the investment horizon of 90 days First Merchants is expected to generate 1.15 times more return on investment than Continental. However, First Merchants is 1.15 times more volatile than Continental AG PK. It trades about 0.08 of its potential returns per unit of risk. Continental AG PK is currently generating about 0.03 per unit of risk. If you would invest  3,649  in First Merchants on September 26, 2024 and sell it today you would earn a total of  438.00  from holding First Merchants or generate 12.0% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.44%
Values	Daily Returns

First Merchants  vs.  Continental AG PK

First Merchants

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in First Merchants are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak primary indicators, First Merchants exhibited solid returns over the last few months and may actually be approaching a breakup point.

Continental AG PK

Risk-Adjusted Performance

2 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Continental AG PK are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, Continental is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with First Merchants and Continental

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

The idea behind First Merchants and Continental AG PK 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 Portfolio Anywhere module to track or share privately all of your investments from the convenience of any device.