Correlation Between Capital One and Ellington Residential

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

By analyzing existing cross correlation between Capital One Financial and Ellington Residential Mortgage, you can compare the effects of market volatilities on Capital One and Ellington Residential 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 Capital One with a short position of Ellington Residential. Check out your portfolio center. Please also check ongoing floating volatility patterns of Capital One and Ellington Residential.

Diversification Opportunities for Capital One and Ellington Residential

0.63

Correlation Coefficient

Capital One  Ellington Residential

Poor diversification

The 3 months correlation between Capital and Ellington is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Capital One Financial and Ellington Residential Mortgage in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ellington Residential and Capital One 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 Capital One Financial are associated (or correlated) with Ellington Residential. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ellington Residential has no effect on the direction of Capital One i.e., Capital One and Ellington Residential go up and down completely randomly.

Pair Corralation between Capital One and Ellington Residential

Considering the 90-day investment horizon Capital One Financial is expected to generate 1.92 times more return on investment than Ellington Residential. However, Capital One is 1.92 times more volatile than Ellington Residential Mortgage. It trades about -0.01 of its potential returns per unit of risk. Ellington Residential Mortgage is currently generating about -0.11 per unit of risk. If you would invest  17,740  in Capital One Financial on December 30, 2024 and sell it today you would lose (387.00) from holding Capital One Financial or give up 2.18% of portfolio value over 90 days.

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

Capital One Financial  vs.  Ellington Residential Mortgage

Capital One Financial

Risk-Adjusted Performance

Weak

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

Ellington Residential

Risk-Adjusted Performance

Very Weak

Over the last 90 days Ellington Residential Mortgage has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Pair Trading with Capital One and Ellington Residential

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

The idea behind Capital One Financial and Ellington Residential Mortgage 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 Stocks Directory module to find actively traded stocks across global markets.