Correlation Between Western Asset and Two Harbors

Can any of the company-specific risk be diversified away by investing in both Western Asset and Two Harbors 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 Western Asset and Two Harbors into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Western Asset Investment and Two Harbors Investments, you can compare the effects of market volatilities on Western Asset and Two Harbors 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 Western Asset with a short position of Two Harbors. Check out your portfolio center. Please also check ongoing floating volatility patterns of Western Asset and Two Harbors.

Diversification Opportunities for Western Asset and Two Harbors

0.3

Correlation Coefficient

Western Asset  Two Harbors

Weak diversification

The 3 months correlation between Western and Two is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Western Asset Investment and Two Harbors Investments in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Two Harbors Investments and Western Asset 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 Western Asset Investment are associated (or correlated) with Two Harbors. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Two Harbors Investments has no effect on the direction of Western Asset i.e., Western Asset and Two Harbors go up and down completely randomly.

Pair Corralation between Western Asset and Two Harbors

Considering the 90-day investment horizon Western Asset is expected to generate 11.91 times less return on investment than Two Harbors. But when comparing it to its historical volatility, Western Asset Investment is 1.33 times less risky than Two Harbors. It trades about 0.01 of its potential returns per unit of risk. Two Harbors Investments is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  2,288  in Two Harbors Investments on October 7, 2024 and sell it today you would earn a total of  202.00  from holding Two Harbors Investments or generate 8.83% return on investment over 90 days.

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

Western Asset Investment  vs.  Two Harbors Investments

Western Asset Investment

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Western Asset Investment has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong technical and fundamental indicators, Western Asset is not utilizing all of its potentials. The latest stock price confusion, may contribute to short-horizon losses for the traders.

Two Harbors Investments

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Two Harbors Investments has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, Two Harbors is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Western Asset and Two Harbors

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

The idea behind Western Asset Investment and Two Harbors Investments 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.