Correlation Between Ares Commercial and Redwood Trust

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

By analyzing existing cross correlation between Ares Commercial Real and Redwood Trust, you can compare the effects of market volatilities on Ares Commercial and Redwood Trust 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 Ares Commercial with a short position of Redwood Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ares Commercial and Redwood Trust.

Diversification Opportunities for Ares Commercial and Redwood Trust

0.34

Correlation Coefficient

Ares Commercial  Redwood Trust

Weak diversification

The 3 months correlation between Ares and Redwood is 0.34. Overlapping area represents the amount of risk that can be diversified away by holding Ares Commercial Real and Redwood Trust in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Redwood Trust and Ares Commercial 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 Ares Commercial Real are associated (or correlated) with Redwood Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Redwood Trust has no effect on the direction of Ares Commercial i.e., Ares Commercial and Redwood Trust go up and down completely randomly.

Pair Corralation between Ares Commercial and Redwood Trust

Given the investment horizon of 90 days Ares Commercial Real is expected to under-perform the Redwood Trust. In addition to that, Ares Commercial is 1.66 times more volatile than Redwood Trust. It trades about -0.12 of its total potential returns per unit of risk. Redwood Trust is currently generating about -0.04 per unit of volatility. If you would invest  638.00  in Redwood Trust on December 27, 2024 and sell it today you would lose (26.00) from holding Redwood Trust or give up 4.08% of portfolio value over 90 days.

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

Ares Commercial Real  vs.  Redwood Trust

Ares Commercial Real

Risk-Adjusted Performance

Very Weak

Over the last 90 days Ares Commercial Real has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's basic indicators remain rather sound which may send shares a bit higher in April 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Redwood Trust

Risk-Adjusted Performance

Very Weak

Over the last 90 days Redwood Trust has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Redwood Trust is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Ares Commercial and Redwood Trust

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

The idea behind Ares Commercial Real and Redwood Trust 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 CEOs Directory module to screen CEOs from public companies around the world.