Correlation Between New Residential and Methode Electronics

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

By analyzing existing cross correlation between New Residential Investment and Methode Electronics, you can compare the effects of market volatilities on New Residential and Methode Electronics 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 New Residential with a short position of Methode Electronics. Check out your portfolio center. Please also check ongoing floating volatility patterns of New Residential and Methode Electronics.

Diversification Opportunities for New Residential and Methode Electronics

0.64

Correlation Coefficient

New Residential  Methode Electronics

Poor diversification

The 3 months correlation between New and Methode is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding New Residential Investment and Methode Electronics in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Methode Electronics and New Residential 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 New Residential Investment are associated (or correlated) with Methode Electronics. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Methode Electronics has no effect on the direction of New Residential i.e., New Residential and Methode Electronics go up and down completely randomly.

Pair Corralation between New Residential and Methode Electronics

Assuming the 90 days trading horizon New Residential is expected to generate 12.48 times less return on investment than Methode Electronics. But when comparing it to its historical volatility, New Residential Investment is 5.74 times less risky than Methode Electronics. It trades about 0.14 of its potential returns per unit of risk. Methode Electronics is currently generating about 0.3 of returns per unit of risk over similar time horizon. If you would invest  850.00  in Methode Electronics on September 21, 2024 and sell it today you would earn a total of  350.00  from holding Methode Electronics or generate 41.18% return on investment over 90 days.

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

New Residential Investment  vs.  Methode Electronics

New Residential Inve

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days New Residential Investment has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, New Residential is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Methode Electronics

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Methode Electronics are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Methode Electronics reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with New Residential and Methode Electronics

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

The idea behind New Residential Investment and Methode Electronics 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.