Correlation Between Redwood Trust and Ellington Residential

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

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

Diversification Opportunities for Redwood Trust and Ellington Residential

0.51

Correlation Coefficient

Redwood Trust  Ellington Residential

Very weak diversification

The 3 months correlation between Redwood and Ellington is 0.51. Overlapping area represents the amount of risk that can be diversified away by holding Redwood Trust and Ellington Residential Mortgage in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ellington Residential 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 Ellington Residential. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ellington Residential has no effect on the direction of Redwood Trust i.e., Redwood Trust and Ellington Residential go up and down completely randomly.

Pair Corralation between Redwood Trust and Ellington Residential

Considering the 90-day investment horizon Redwood Trust is expected to generate 1.3 times more return on investment than Ellington Residential. However, Redwood Trust is 1.3 times more volatile than Ellington Residential Mortgage. It trades about -0.04 of its potential returns per unit of risk. Ellington Residential Mortgage is currently generating about -0.11 per unit of risk. If you would invest  626.00  in Redwood Trust on December 29, 2024 and sell it today you would lose (25.00) from holding Redwood Trust or give up 3.99% of portfolio value over 90 days.

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

Redwood Trust  vs.  Ellington Residential Mortgage

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.

Ellington Residential

Risk-Adjusted Performance

Very Weak

Over the last 90 days Ellington Residential Mortgage has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's basic indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Pair Trading with Redwood Trust and Ellington Residential

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

The idea behind Redwood Trust and Ellington Residential Mortgage 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.