Correlation Between ARMOUR Residential and Invesco Mortgage

Can any of the company-specific risk be diversified away by investing in both ARMOUR Residential and Invesco Mortgage 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 Invesco Mortgage 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 Invesco Mortgage Capital, you can compare the effects of market volatilities on ARMOUR Residential and Invesco Mortgage 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 Invesco Mortgage. Check out your portfolio center. Please also check ongoing floating volatility patterns of ARMOUR Residential and Invesco Mortgage.

Diversification Opportunities for ARMOUR Residential and Invesco Mortgage

-0.51

Correlation Coefficient

ARMOUR Residential  Invesco Mortgage

Excellent diversification

The 3 months correlation between ARMOUR and Invesco is -0.51. Overlapping area represents the amount of risk that can be diversified away by holding ARMOUR Residential REIT and Invesco Mortgage Capital in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Invesco Mortgage Capital 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 Invesco Mortgage. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Invesco Mortgage Capital has no effect on the direction of ARMOUR Residential i.e., ARMOUR Residential and Invesco Mortgage go up and down completely randomly.

Pair Corralation between ARMOUR Residential and Invesco Mortgage

Assuming the 90 days trading horizon ARMOUR Residential is expected to generate 1.69 times less return on investment than Invesco Mortgage. But when comparing it to its historical volatility, ARMOUR Residential REIT is 1.46 times less risky than Invesco Mortgage. It trades about 0.06 of its potential returns per unit of risk. Invesco Mortgage Capital is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  1,643  in Invesco Mortgage Capital on September 23, 2024 and sell it today you would earn a total of  854.00  from holding Invesco Mortgage Capital or generate 51.98% return on investment over 90 days.

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

ARMOUR Residential REIT  vs.  Invesco Mortgage Capital

ARMOUR Residential REIT

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days ARMOUR Residential REIT has generated negative risk-adjusted returns adding no value to investors with long positions. 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.

Invesco Mortgage Capital

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Invesco Mortgage Capital are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Invesco Mortgage is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with ARMOUR Residential and Invesco Mortgage

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

The idea behind ARMOUR Residential REIT and Invesco Mortgage Capital 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 Crypto Correlations module to use cryptocurrency correlation module to diversify your cryptocurrency portfolio across multiple coins.