Correlation Between Redwood Trust and Ares Commercial

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

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

Diversification Opportunities for Redwood Trust and Ares Commercial

0.34

Correlation Coefficient

Redwood Trust  Ares Commercial

Weak diversification

The 3 months correlation between Redwood and Ares is 0.34. Overlapping area represents the amount of risk that can be diversified away by holding Redwood Trust and Ares Commercial Real in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ares Commercial Real and Redwood Trust 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 Redwood Trust are associated (or correlated) with Ares Commercial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ares Commercial Real has no effect on the direction of Redwood Trust i.e., Redwood Trust and Ares Commercial go up and down completely randomly.

Pair Corralation between Redwood Trust and Ares Commercial

Considering the 90-day investment horizon Redwood Trust is expected to generate 0.6 times more return on investment than Ares Commercial. However, Redwood Trust is 1.66 times less risky than Ares Commercial. It trades about -0.04 of its potential returns per unit of risk. Ares Commercial Real is currently generating about -0.12 per unit of risk. If you would invest  638.00  in Redwood Trust on December 27, 2024 and sell it today you would lose (26.00) from holding Redwood Trust or give up 4.08% of portfolio value over 90 days.

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

Redwood Trust  vs.  Ares Commercial Real

Redwood Trust

Risk-Adjusted Performance

Very Weak

Over the last 90 days Redwood Trust has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Redwood Trust is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.

Ares Commercial Real

Risk-Adjusted Performance

Very Weak

Over the last 90 days Ares Commercial Real has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's basic indicators remain rather sound which may send shares a bit higher in April 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with Redwood Trust and Ares Commercial

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

The idea behind Redwood Trust and Ares Commercial Real 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.