Correlation Between MFA Financial and Redwood Trust

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

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

Diversification Opportunities for MFA Financial and Redwood Trust

-0.37

Correlation Coefficient

MFA Financial  Redwood Trust

Very good diversification

The 3 months correlation between MFA and Redwood is -0.37. Overlapping area represents the amount of risk that can be diversified away by holding MFA Financial and Redwood Trust in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Redwood Trust and MFA Financial 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 MFA Financial 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 MFA Financial i.e., MFA Financial and Redwood Trust go up and down completely randomly.

Pair Corralation between MFA Financial and Redwood Trust

Assuming the 90 days trading horizon MFA Financial is expected to under-perform the Redwood Trust. In addition to that, MFA Financial is 1.45 times more volatile than Redwood Trust. It trades about -0.05 of its total potential returns per unit of risk. Redwood Trust is currently generating about -0.05 per unit of volatility. If you would invest  2,622  in Redwood Trust on September 22, 2024 and sell it today you would lose (46.00) from holding Redwood Trust or give up 1.75% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	97.73%
Values	Daily Returns

MFA Financial  vs.  Redwood Trust

MFA Financial

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days MFA Financial has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, MFA Financial is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Redwood Trust

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Redwood Trust are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Redwood Trust is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with MFA Financial and Redwood Trust

The main advantage of trading using opposite MFA Financial and Redwood Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if MFA Financial 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 MFA Financial 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.

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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.