Correlation Between MFA Financial and Two Harbors

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

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

Diversification Opportunities for MFA Financial and Two Harbors

0.28

Correlation Coefficient

MFA Financial  Two Harbors

Modest diversification

The 3 months correlation between MFA and Two is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding MFA Financial and Two Harbors Investment in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Two Harbors Investment and MFA Financial 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 MFA Financial are associated (or correlated) with Two Harbors. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Two Harbors Investment has no effect on the direction of MFA Financial i.e., MFA Financial and Two Harbors go up and down completely randomly.

Pair Corralation between MFA Financial and Two Harbors

Assuming the 90 days trading horizon MFA Financial is expected to generate 2.08 times more return on investment than Two Harbors. However, MFA Financial is 2.08 times more volatile than Two Harbors Investment. It trades about 0.1 of its potential returns per unit of risk. Two Harbors Investment is currently generating about 0.18 per unit of risk. 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	Very Weak
Accuracy	100.0%
Values	Daily Returns

MFA Financial  vs.  Two Harbors Investment

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.

Two Harbors Investment

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Two Harbors Investment are ranked lower than 14 (%) 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.

Pair Trading with MFA Financial and Two Harbors

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

The idea behind MFA Financial and Two Harbors Investment 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.