Correlation Between Annaly Capital and Ellington Residential

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

By analyzing existing cross correlation between Annaly Capital Management and Ellington Residential Mortgage, you can compare the effects of market volatilities on Annaly Capital and Ellington Residential 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 Annaly Capital with a short position of Ellington Residential. Check out your portfolio center. Please also check ongoing floating volatility patterns of Annaly Capital and Ellington Residential.

Diversification Opportunities for Annaly Capital and Ellington Residential

0.24

Correlation Coefficient

Annaly Capital  Ellington Residential

Modest diversification

The 3 months correlation between Annaly and Ellington is 0.24. Overlapping area represents the amount of risk that can be diversified away by holding Annaly Capital Management and Ellington Residential Mortgage in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ellington Residential and Annaly Capital 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 Annaly Capital Management are associated (or correlated) with Ellington Residential. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ellington Residential has no effect on the direction of Annaly Capital i.e., Annaly Capital and Ellington Residential go up and down completely randomly.

Pair Corralation between Annaly Capital and Ellington Residential

Considering the 90-day investment horizon Annaly Capital Management is expected to generate 1.75 times more return on investment than Ellington Residential. However, Annaly Capital is 1.75 times more volatile than Ellington Residential Mortgage. It trades about 0.42 of its potential returns per unit of risk. Ellington Residential Mortgage is currently generating about -0.01 per unit of risk. If you would invest  1,984  in Annaly Capital Management on November 28, 2024 and sell it today you would earn a total of  182.00  from holding Annaly Capital Management or generate 9.17% return on investment over 90 days.

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

Annaly Capital Management  vs.  Ellington Residential Mortgage

Annaly Capital Management

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Annaly Capital Management are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak essential indicators, Annaly Capital showed solid returns over the last few months and may actually be approaching a breakup point.

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.

Pair Trading with Annaly Capital and Ellington Residential

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

The idea behind Annaly Capital Management and Ellington Residential Mortgage 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.