Correlation Between Two Harbors and MFA Financial

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

By analyzing existing cross correlation between Two Harbors Investment and MFA Financial, you can compare the effects of market volatilities on Two Harbors and MFA Financial 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 Two Harbors with a short position of MFA Financial. Check out your portfolio center. Please also check ongoing floating volatility patterns of Two Harbors and MFA Financial.

Diversification Opportunities for Two Harbors and MFA Financial

0.53

Correlation Coefficient

Two Harbors  MFA Financial

Very weak diversification

The 3 months correlation between Two and MFA is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding Two Harbors Investment and MFA Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MFA Financial and Two Harbors 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 Two Harbors Investment are associated (or correlated) with MFA Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MFA Financial has no effect on the direction of Two Harbors i.e., Two Harbors and MFA Financial go up and down completely randomly.

Pair Corralation between Two Harbors and MFA Financial

Assuming the 90 days trading horizon Two Harbors Investment is expected to under-perform the MFA Financial. But the preferred stock apears to be less risky and, when comparing its historical volatility, Two Harbors Investment is 1.34 times less risky than MFA Financial. The preferred stock trades about -0.02 of its potential returns per unit of risk. The MFA Financial is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  2,199  in MFA Financial on September 3, 2024 and sell it today you would earn a total of  117.00  from holding MFA Financial or generate 5.32% return on investment over 90 days.

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

Two Harbors Investment  vs.  MFA Financial

Two Harbors Investment

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Two Harbors Investment has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Two Harbors is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

MFA Financial

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in MFA Financial are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, MFA Financial is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Two Harbors and MFA Financial

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

The idea behind Two Harbors Investment and MFA Financial 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.