Correlation Between Lument Finance and Ellington Financial

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

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

Diversification Opportunities for Lument Finance and Ellington Financial

0.63

Correlation Coefficient

Lument Finance  Ellington Financial

Poor diversification

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

Pair Corralation between Lument Finance and Ellington Financial

Assuming the 90 days trading horizon Lument Finance Trust is expected to generate 6.56 times more return on investment than Ellington Financial. However, Lument Finance is 6.56 times more volatile than Ellington Financial. It trades about 0.21 of its potential returns per unit of risk. Ellington Financial is currently generating about 0.17 per unit of risk. If you would invest  2,265  in Lument Finance Trust on September 27, 2024 and sell it today you would earn a total of  65.00  from holding Lument Finance Trust or generate 2.87% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	66.67%
Values	Daily Returns

Lument Finance Trust  vs.  Ellington Financial

Lument Finance Trust

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Lument Finance Trust are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Lument Finance is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Ellington Financial

Risk-Adjusted Performance

0 of 100

Modest

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

Pair Trading with Lument Finance and Ellington Financial

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

The idea behind Lument Finance Trust and Ellington Financial 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.