Correlation Between Southern Michigan and First Financial

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

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

Diversification Opportunities for Southern Michigan and First Financial

0.86

Correlation Coefficient

Southern Michigan  First Financial

Very poor diversification

The 3 months correlation between Southern and First is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding Southern Michigan Bancorp and First Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Financial and Southern Michigan 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 Southern Michigan Bancorp are associated (or correlated) with First Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Financial has no effect on the direction of Southern Michigan i.e., Southern Michigan and First Financial go up and down completely randomly.

Pair Corralation between Southern Michigan and First Financial

Given the investment horizon of 90 days Southern Michigan Bancorp is expected to generate 0.34 times more return on investment than First Financial. However, Southern Michigan Bancorp is 2.94 times less risky than First Financial. It trades about 0.23 of its potential returns per unit of risk. First Financial is currently generating about 0.07 per unit of risk. If you would invest  1,715  in Southern Michigan Bancorp on September 26, 2024 and sell it today you would earn a total of  210.00  from holding Southern Michigan Bancorp or generate 12.24% return on investment over 90 days.

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

Southern Michigan Bancorp  vs.  First Financial

Southern Michigan Bancorp

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Southern Michigan Bancorp are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of rather abnormal primary indicators, Southern Michigan may actually be approaching a critical reversion point that can send shares even higher in January 2025.

First Financial

Risk-Adjusted Performance

5 of 100

Modest

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

Pair Trading with Southern Michigan and First Financial

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

The idea behind Southern Michigan Bancorp and First 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.

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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 Companies Directory module to evaluate performance of over 100,000 Stocks, Funds, and ETFs against different fundamentals.