Correlation Between Chatham Lodging and Diamondrock Hospitality

Can any of the company-specific risk be diversified away by investing in both Chatham Lodging and Diamondrock Hospitality 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 Chatham Lodging and Diamondrock Hospitality into the same portfolio, which is an essential part of the fundamental portfolio management process.

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

Diversification Opportunities for Chatham Lodging and Diamondrock Hospitality

0.81

Correlation Coefficient

Chatham Lodging  Diamondrock Hospitality

Very poor diversification

The 3 months correlation between Chatham and Diamondrock is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Chatham Lodging Trust and Diamondrock Hospitality in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Diamondrock Hospitality and Chatham Lodging 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 Chatham Lodging Trust are associated (or correlated) with Diamondrock Hospitality. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Diamondrock Hospitality has no effect on the direction of Chatham Lodging i.e., Chatham Lodging and Diamondrock Hospitality go up and down completely randomly.

Pair Corralation between Chatham Lodging and Diamondrock Hospitality

Given the investment horizon of 90 days Chatham Lodging Trust is expected to generate 1.26 times more return on investment than Diamondrock Hospitality. However, Chatham Lodging is 1.26 times more volatile than Diamondrock Hospitality. It trades about 0.08 of its potential returns per unit of risk. Diamondrock Hospitality is currently generating about 0.08 per unit of risk. If you would invest  834.00  in Chatham Lodging Trust on September 2, 2024 and sell it today you would earn a total of  87.00  from holding Chatham Lodging Trust or generate 10.43% return on investment over 90 days.

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

Chatham Lodging Trust  vs.  Diamondrock Hospitality

Chatham Lodging Trust

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Chatham Lodging Trust are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating fundamental indicators, Chatham Lodging may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Diamondrock Hospitality

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Diamondrock Hospitality are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite fairly weak basic indicators, Diamondrock Hospitality may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Chatham Lodging and Diamondrock Hospitality

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

The idea behind Chatham Lodging Trust and Diamondrock Hospitality 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 Aroon Oscillator module to analyze current equity momentum using Aroon Oscillator and other momentum ratios.