Correlation Between Ellington Residential and Redwood Trust

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

Diversification Opportunities for Ellington Residential and Redwood Trust

0.62

Correlation Coefficient

Ellington Residential  Redwood Trust

Poor diversification

The 3 months correlation between Ellington and Redwood is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding Ellington Residential Mortgage and Redwood Trust in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Redwood 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 Redwood Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Redwood Trust has no effect on the direction of Ellington Residential i.e., Ellington Residential and Redwood Trust go up and down completely randomly.

Pair Corralation between Ellington Residential and Redwood Trust

Given the investment horizon of 90 days Ellington Residential Mortgage is expected to generate 0.74 times more return on investment than Redwood Trust. However, Ellington Residential Mortgage is 1.35 times less risky than Redwood Trust. It trades about 0.02 of its potential returns per unit of risk. Redwood Trust is currently generating about -0.01 per unit of risk. If you would invest  665.00  in Ellington Residential Mortgage on September 3, 2024 and sell it today you would earn a total of  8.00  from holding Ellington Residential Mortgage or generate 1.2% return on investment over 90 days.

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

Ellington Residential Mortgage  vs.  Redwood Trust

Ellington Residential

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Ellington Residential Mortgage are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Ellington Residential is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Redwood Trust

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Redwood Trust has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Redwood 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 Redwood Trust

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

The idea behind Ellington Residential Mortgage and Redwood 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.