Correlation Between Ellington Residential and Orchid Island

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

Diversification Opportunities for Ellington Residential and Orchid Island

0.22

Correlation Coefficient

Ellington Residential  Orchid Island

Modest diversification

The 3 months correlation between Ellington and Orchid is 0.22. Overlapping area represents the amount of risk that can be diversified away by holding Ellington Residential Mortgage and Orchid Island Capital in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Orchid Island Capital 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 Orchid Island. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Orchid Island Capital has no effect on the direction of Ellington Residential i.e., Ellington Residential and Orchid Island go up and down completely randomly.

Pair Corralation between Ellington Residential and Orchid Island

Given the investment horizon of 90 days Ellington Residential Mortgage is expected to under-perform the Orchid Island. But the stock apears to be less risky and, when comparing its historical volatility, Ellington Residential Mortgage is 2.65 times less risky than Orchid Island. The stock trades about -0.01 of its potential returns per unit of risk. The Orchid Island Capital is currently generating about 0.39 of returns per unit of risk over similar time horizon. If you would invest  778.00  in Orchid Island Capital on November 28, 2024 and sell it today you would earn a total of  101.00  from holding Orchid Island Capital or generate 12.98% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	95.45%
Values	Daily Returns

Ellington Residential Mortgage  vs.  Orchid Island Capital

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 very healthy basic indicators, Ellington Residential is not utilizing all of its potentials. The current stock price disarray, may contribute to short-term losses for the investors.

Orchid Island Capital

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Orchid Island Capital are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Orchid Island exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Ellington Residential and Orchid Island

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

The idea behind Ellington Residential Mortgage and Orchid Island 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.

Check out your portfolio center.

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 Portfolio Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.