Correlation Between Ellington Residential and Northern Trust

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

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

Diversification Opportunities for Ellington Residential and Northern Trust

0.69

Correlation Coefficient

Ellington Residential  Northern Trust

Poor diversification

The 3 months correlation between Ellington and Northern is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding Ellington Residential Mortgage and Northern Trust in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Northern Trust and Ellington 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 Ellington Residential Mortgage are associated (or correlated) with Northern Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Northern Trust has no effect on the direction of Ellington Residential i.e., Ellington Residential and Northern Trust go up and down completely randomly.

Pair Corralation between Ellington Residential and Northern Trust

Given the investment horizon of 90 days Ellington Residential Mortgage is expected to under-perform the Northern Trust. But the stock apears to be less risky and, when comparing its historical volatility, Ellington Residential Mortgage is 1.34 times less risky than Northern Trust. The stock trades about -0.11 of its potential returns per unit of risk. The Northern Trust is currently generating about -0.04 of returns per unit of risk over similar time horizon. If you would invest  10,194  in Northern Trust on December 30, 2024 and sell it today you would lose (479.00) from holding Northern Trust or give up 4.7% of portfolio value over 90 days.

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

Ellington Residential Mortgage  vs.  Northern Trust

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.

Northern Trust

Risk-Adjusted Performance

Very Weak

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

Pair Trading with Ellington Residential and Northern Trust

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

The idea behind Ellington Residential Mortgage and Northern 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.