Correlation Between First Merchants and First Business

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

By analyzing existing cross correlation between First Merchants and First Business Financial, you can compare the effects of market volatilities on First Merchants and First Business 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 First Business. Check out your portfolio center. Please also check ongoing floating volatility patterns of First Merchants and First Business.

Diversification Opportunities for First Merchants and First Business

0.98

Correlation Coefficient

First Merchants  First Business

Almost no diversification

The 3 months correlation between First and First is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding First Merchants and First Business Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Business Financial 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 First Business. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Business Financial has no effect on the direction of First Merchants i.e., First Merchants and First Business go up and down completely randomly.

Pair Corralation between First Merchants and First Business

Given the investment horizon of 90 days First Merchants is expected to generate 1.11 times less return on investment than First Business. In addition to that, First Merchants is 1.0 times more volatile than First Business Financial. It trades about 0.12 of its total potential returns per unit of risk. First Business Financial is currently generating about 0.14 per unit of volatility. If you would invest  3,376  in First Business Financial on September 14, 2024 and sell it today you would earn a total of  1,524  from holding First Business Financial or generate 45.14% return on investment over 90 days.

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

First Merchants  vs.  First Business Financial

First Merchants

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in First Merchants are ranked lower than 8 (%) 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.

First Business Financial

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in First Business Financial are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak forward indicators, First Business may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with First Merchants and First Business

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

The idea behind First Merchants and First Business Financial 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.