Correlation Between RLJ Lodging and Chatham Lodging

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

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

Diversification Opportunities for RLJ Lodging and Chatham Lodging

0.81

Correlation Coefficient

RLJ Lodging  Chatham Lodging

Very poor diversification

The 3 months correlation between RLJ and Chatham is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding RLJ Lodging Trust and Chatham Lodging Trust in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Chatham Lodging Trust and RLJ Lodging 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 RLJ Lodging Trust are associated (or correlated) with Chatham Lodging. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Chatham Lodging Trust has no effect on the direction of RLJ Lodging i.e., RLJ Lodging and Chatham Lodging go up and down completely randomly.

Pair Corralation between RLJ Lodging and Chatham Lodging

Considering the 90-day investment horizon RLJ Lodging Trust is expected to generate 1.01 times more return on investment than Chatham Lodging. However, RLJ Lodging is 1.01 times more volatile than Chatham Lodging Trust. It trades about -0.09 of its potential returns per unit of risk. Chatham Lodging Trust is currently generating about -0.11 per unit of risk. If you would invest  1,006  in RLJ Lodging Trust on November 29, 2024 and sell it today you would lose (88.00) from holding RLJ Lodging Trust or give up 8.75% of portfolio value over 90 days.

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

RLJ Lodging Trust  vs.  Chatham Lodging Trust

RLJ Lodging Trust

Risk-Adjusted Performance

Very Weak

Over the last 90 days RLJ Lodging Trust has generated negative risk-adjusted returns adding no value to investors with long positions. Even with latest unfluctuating performance, the Stock's essential indicators remain steady and the new chaos on Wall Street may also be a sign of medium-term gains for the company stakeholders.

Chatham Lodging Trust

Risk-Adjusted Performance

Very Weak

Over the last 90 days Chatham Lodging Trust has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unfluctuating performance, the Stock's fundamental indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Pair Trading with RLJ Lodging and Chatham Lodging

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

The idea behind RLJ Lodging Trust and Chatham Lodging 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.