Correlation Between ARMOUR Residential and Compass Diversified

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

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

Diversification Opportunities for ARMOUR Residential and Compass Diversified

-0.28

Correlation Coefficient

ARMOUR Residential  Compass Diversified

Very good diversification

The 3 months correlation between ARMOUR and Compass is -0.28. Overlapping area represents the amount of risk that can be diversified away by holding ARMOUR Residential REIT and Compass Diversified in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Compass Diversified and ARMOUR 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 ARMOUR Residential REIT are associated (or correlated) with Compass Diversified. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Compass Diversified has no effect on the direction of ARMOUR Residential i.e., ARMOUR Residential and Compass Diversified go up and down completely randomly.

Pair Corralation between ARMOUR Residential and Compass Diversified

Assuming the 90 days trading horizon ARMOUR Residential REIT is expected to generate 0.96 times more return on investment than Compass Diversified. However, ARMOUR Residential REIT is 1.04 times less risky than Compass Diversified. It trades about 0.12 of its potential returns per unit of risk. Compass Diversified is currently generating about -0.06 per unit of risk. If you would invest  2,072  in ARMOUR Residential REIT on December 30, 2024 and sell it today you would earn a total of  114.00  from holding ARMOUR Residential REIT or generate 5.5% return on investment over 90 days.

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

ARMOUR Residential REIT  vs.  Compass Diversified

ARMOUR Residential REIT

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in ARMOUR Residential REIT are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, ARMOUR Residential is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Compass Diversified

Risk-Adjusted Performance

Very Weak

Over the last 90 days Compass Diversified has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, Compass Diversified is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with ARMOUR Residential and Compass Diversified

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

The idea behind ARMOUR Residential REIT and Compass Diversified 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.