Correlation Between Starwood Property and Two Harbors

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

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

Diversification Opportunities for Starwood Property and Two Harbors

0.24

Correlation Coefficient

Starwood Property  Two Harbors

Modest diversification

The 3 months correlation between Starwood and Two is 0.24. Overlapping area represents the amount of risk that can be diversified away by holding Starwood Property Trust and Two Harbors Investments in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Two Harbors Investments and Starwood Property 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 Starwood Property Trust 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 Investments has no effect on the direction of Starwood Property i.e., Starwood Property and Two Harbors go up and down completely randomly.

Pair Corralation between Starwood Property and Two Harbors

Given the investment horizon of 90 days Starwood Property Trust is expected to generate 0.7 times more return on investment than Two Harbors. However, Starwood Property Trust is 1.43 times less risky than Two Harbors. It trades about 0.05 of its potential returns per unit of risk. Two Harbors Investments is currently generating about -0.15 per unit of risk. If you would invest  1,946  in Starwood Property Trust on September 5, 2024 and sell it today you would earn a total of  54.00  from holding Starwood Property Trust or generate 2.77% return on investment over 90 days.

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

Starwood Property Trust  vs.  Two Harbors Investments

Starwood Property Trust

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Starwood Property Trust are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, Starwood Property is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Two Harbors Investments

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Two Harbors Investments has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain 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 Starwood Property and Two Harbors

The main advantage of trading using opposite Starwood Property and Two Harbors positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Starwood Property 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 Starwood Property Trust and Two Harbors Investments 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.

Check out your portfolio center.

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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.