Correlation Between PennyMac Mortgage and Redwood Trust

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

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

Diversification Opportunities for PennyMac Mortgage and Redwood Trust

-0.3

Correlation Coefficient

PennyMac Mortgage  Redwood Trust

Very good diversification

The 3 months correlation between PennyMac and Redwood is -0.3. Overlapping area represents the amount of risk that can be diversified away by holding PennyMac Mortgage Investment and Redwood Trust in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Redwood Trust and PennyMac Mortgage 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 PennyMac Mortgage Investment 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 PennyMac Mortgage i.e., PennyMac Mortgage and Redwood Trust go up and down completely randomly.

Pair Corralation between PennyMac Mortgage and Redwood Trust

Assuming the 90 days trading horizon PennyMac Mortgage Investment is expected to under-perform the Redwood Trust. But the preferred stock apears to be less risky and, when comparing its historical volatility, PennyMac Mortgage Investment is 1.04 times less risky than Redwood Trust. The preferred stock trades about -0.22 of its potential returns per unit of risk. The Redwood Trust is currently generating about -0.05 of returns per unit of risk over similar time horizon. 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

PennyMac Mortgage Investment  vs.  Redwood Trust

PennyMac Mortgage

Risk-Adjusted Performance

0 of 100

Very Weak

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

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 PennyMac Mortgage and Redwood Trust

The main advantage of trading using opposite PennyMac Mortgage and Redwood Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if PennyMac Mortgage 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 PennyMac Mortgage Investment 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.