Correlation Between DOW and Merchants Bancorp

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Can any of the company-specific risk be diversified away by investing in both DOW 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 DOW and Merchants Bancorp into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between DOW and Merchants Bancorp, you can compare the effects of market volatilities on DOW 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 DOW with a short position of Merchants Bancorp. Check out your portfolio center. Please also check ongoing floating volatility patterns of DOW and Merchants Bancorp.

Diversification Opportunities for DOW and Merchants Bancorp

0.82
  Correlation Coefficient

Very poor diversification

The 3 months correlation between DOW and Merchants is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding DOW and Merchants Bancorp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Merchants Bancorp and DOW 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 DOW 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 DOW i.e., DOW and Merchants Bancorp go up and down completely randomly.
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Pair Corralation between DOW and Merchants Bancorp

Given the investment horizon of 90 days DOW is expected to generate 2.67 times less return on investment than Merchants Bancorp. But when comparing it to its historical volatility, DOW is 1.74 times less risky than Merchants Bancorp. It trades about 0.43 of its potential returns per unit of risk. Merchants Bancorp is currently generating about 0.66 of returns per unit of risk over similar time horizon. If you would invest  2,222  in Merchants Bancorp on May 14, 2022 and sell it today you would earn a total of  620.00  from holding Merchants Bancorp or generate 27.9% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

DOW  vs.  Merchants Bancorp

 Performance (%) 
       Timeline  

DOW and Merchants Bancorp Volatility Contrast

   Predicted Return Density   
       Returns  

DOW

Pair trading matchups for DOW

Ark Innovation vs. DOW
Olema Pharmaceuticals vs. DOW
Universal Health vs. DOW
Semiconductor Bear vs. DOW
Rolls Royce vs. DOW
Nike vs. DOW
Essential Properties vs. DOW
Horizon Therapeutics vs. DOW
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against DOW as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. DOW's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, DOW's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to DOW.

Merchants Bancorp

Pair trading matchups for Merchants Bancorp

Pair Trading with DOW and Merchants Bancorp

The main advantage of trading using opposite DOW and Merchants Bancorp positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if DOW 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.

DOW

Pair trading matchups for DOW

Horizon Therapeutics vs. DOW
Semiconductor Bear vs. DOW
Ark Innovation vs. DOW
Cto Realty vs. DOW
Prog Hldgs vs. DOW
Essential Properties vs. DOW
Rolls Royce vs. DOW
Nike vs. DOW
Olema Pharmaceuticals vs. DOW
The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against DOW as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. DOW's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, DOW's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to DOW.
The idea behind DOW 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.

Merchants Bancorp

Pair trading matchups for Merchants Bancorp

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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.

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