Correlation Between RLJ Lodging and Western Digital

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

Diversification Opportunities for RLJ Lodging and Western Digital

0.09

Correlation Coefficient

RLJ Lodging  Western Digital

Significant diversification

The 3 months correlation between RLJ and Western is 0.09. Overlapping area represents the amount of risk that can be diversified away by holding RLJ Lodging Trust and Western Digital in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Western Digital 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 Western Digital. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Western Digital has no effect on the direction of RLJ Lodging i.e., RLJ Lodging and Western Digital go up and down completely randomly.

Pair Corralation between RLJ Lodging and Western Digital

Considering the 90-day investment horizon RLJ Lodging Trust is expected to generate 0.63 times more return on investment than Western Digital. However, RLJ Lodging Trust is 1.6 times less risky than Western Digital. It trades about -0.06 of its potential returns per unit of risk. Western Digital is currently generating about -0.04 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 (59.00) from holding RLJ Lodging Trust or give up 5.86% of portfolio value over 90 days.

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

RLJ Lodging Trust  vs.  Western Digital

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 relatively steady essential indicators, RLJ Lodging is not utilizing all of its potentials. The recent stock price chaos, may contribute to medium-term losses for the stakeholders.

Western Digital

Risk-Adjusted Performance

Very Weak

Over the last 90 days Western Digital has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Pair Trading with RLJ Lodging and Western Digital

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

The idea behind RLJ Lodging Trust and Western Digital 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 Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .