Correlation Between Two Harbors and Redwood Trust

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

Diversification Opportunities for Two Harbors and Redwood Trust

0.7

Correlation Coefficient

Two Harbors  Redwood Trust

Poor diversification

The 3 months correlation between Two and Redwood is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Two Harbors Investment and Redwood Trust in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Redwood Trust 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 Redwood Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Redwood Trust has no effect on the direction of Two Harbors i.e., Two Harbors and Redwood Trust go up and down completely randomly.

Pair Corralation between Two Harbors and Redwood Trust

Assuming the 90 days trading horizon Two Harbors Investment is expected to generate 0.38 times more return on investment than Redwood Trust. However, Two Harbors Investment is 2.63 times less risky than Redwood Trust. It trades about 0.08 of its potential returns per unit of risk. Redwood Trust is currently generating about -0.05 per unit of risk. If you would invest  2,461  in Two Harbors Investment on September 22, 2024 and sell it today you would earn a total of  22.00  from holding Two Harbors Investment or generate 0.89% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	97.73%
Values	Daily Returns

Two Harbors Investment  vs.  Redwood Trust

Two Harbors Investment

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Two Harbors Investment are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, Two Harbors is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Redwood Trust

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Redwood Trust are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Redwood Trust is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Two Harbors and Redwood Trust

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

The idea behind Two Harbors Investment and Redwood 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.