Correlation Between PennyMac Mortgage and ARMOUR Residential

Can any of the company-specific risk be diversified away by investing in both PennyMac Mortgage and ARMOUR 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 PennyMac Mortgage and ARMOUR Residential 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 ARMOUR Residential REIT, you can compare the effects of market volatilities on PennyMac Mortgage and ARMOUR 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 PennyMac Mortgage with a short position of ARMOUR Residential. Check out your portfolio center. Please also check ongoing floating volatility patterns of PennyMac Mortgage and ARMOUR Residential.

Diversification Opportunities for PennyMac Mortgage and ARMOUR Residential

0.62

Correlation Coefficient

PennyMac Mortgage  ARMOUR Residential

Poor diversification

The 3 months correlation between PennyMac and ARMOUR is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding PennyMac Mortgage Investment and ARMOUR Residential REIT in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ARMOUR Residential REIT 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 ARMOUR Residential. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ARMOUR Residential REIT has no effect on the direction of PennyMac Mortgage i.e., PennyMac Mortgage and ARMOUR Residential go up and down completely randomly.

Pair Corralation between PennyMac Mortgage and ARMOUR Residential

Considering the 90-day investment horizon PennyMac Mortgage Investment is expected to generate 1.22 times more return on investment than ARMOUR Residential. However, PennyMac Mortgage is 1.22 times more volatile than ARMOUR Residential REIT. It trades about 0.22 of its potential returns per unit of risk. ARMOUR Residential REIT is currently generating about -0.02 per unit of risk. If you would invest  1,244  in PennyMac Mortgage Investment on December 28, 2024 and sell it today you would earn a total of  233.00  from holding PennyMac Mortgage Investment or generate 18.73% return on investment over 90 days.

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

PennyMac Mortgage Investment  vs.  ARMOUR Residential REIT

PennyMac Mortgage

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in PennyMac Mortgage Investment are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak primary indicators, PennyMac Mortgage unveiled solid returns over the last few months and may actually be approaching a breakup point.

ARMOUR Residential REIT

Risk-Adjusted Performance

Very Weak

Over the last 90 days ARMOUR Residential REIT has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable basic indicators, ARMOUR Residential is not utilizing all of its potentials. The latest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with PennyMac Mortgage and ARMOUR Residential

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

The idea behind PennyMac Mortgage Investment and ARMOUR Residential REIT 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.