Correlation Between PennyMac Mortgage and Orchid Island

Can any of the company-specific risk be diversified away by investing in both PennyMac Mortgage and Orchid Island 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 Orchid Island 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 Orchid Island Capital, you can compare the effects of market volatilities on PennyMac Mortgage and Orchid Island 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 Orchid Island. Check out your portfolio center. Please also check ongoing floating volatility patterns of PennyMac Mortgage and Orchid Island.

Diversification Opportunities for PennyMac Mortgage and Orchid Island

0.21

Correlation Coefficient

PennyMac Mortgage  Orchid Island

Modest diversification

The 3 months correlation between PennyMac and Orchid is 0.21. Overlapping area represents the amount of risk that can be diversified away by holding PennyMac Mortgage Investment and Orchid Island Capital in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Orchid Island Capital 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 Orchid Island. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Orchid Island Capital has no effect on the direction of PennyMac Mortgage i.e., PennyMac Mortgage and Orchid Island go up and down completely randomly.

Pair Corralation between PennyMac Mortgage and Orchid Island

Considering the 90-day investment horizon PennyMac Mortgage is expected to generate 8.51 times less return on investment than Orchid Island. But when comparing it to its historical volatility, PennyMac Mortgage Investment is 1.42 times less risky than Orchid Island. It trades about 0.01 of its potential returns per unit of risk. Orchid Island Capital is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  785.00  in Orchid Island Capital on September 12, 2024 and sell it today you would earn a total of  17.00  from holding Orchid Island Capital or generate 2.17% return on investment over 90 days.

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

PennyMac Mortgage Investment  vs.  Orchid Island Capital

PennyMac Mortgage

Risk-Adjusted Performance

0 of 100

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 comparatively stable primary indicators, PennyMac Mortgage is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Orchid Island Capital

Risk-Adjusted Performance

2 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Orchid Island Capital are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, Orchid Island is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with PennyMac Mortgage and Orchid Island

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

The idea behind PennyMac Mortgage Investment and Orchid Island Capital 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.