Correlation Between Two Harbors and PennyMac Mortgage

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

By analyzing existing cross correlation between Two Harbors Investments and PennyMac Mortgage Investment, you can compare the effects of market volatilities on Two Harbors and PennyMac Mortgage 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 PennyMac Mortgage. Check out your portfolio center. Please also check ongoing floating volatility patterns of Two Harbors and PennyMac Mortgage.

Diversification Opportunities for Two Harbors and PennyMac Mortgage

0.64

Correlation Coefficient

Two Harbors  PennyMac Mortgage

Poor diversification

The 3 months correlation between Two and PennyMac is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Two Harbors Investments and PennyMac Mortgage Investment in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PennyMac Mortgage 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 Investments are associated (or correlated) with PennyMac Mortgage. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PennyMac Mortgage has no effect on the direction of Two Harbors i.e., Two Harbors and PennyMac Mortgage go up and down completely randomly.

Pair Corralation between Two Harbors and PennyMac Mortgage

Considering the 90-day investment horizon Two Harbors Investments is expected to under-perform the PennyMac Mortgage. In addition to that, Two Harbors is 1.53 times more volatile than PennyMac Mortgage Investment. It trades about -0.17 of its total potential returns per unit of risk. PennyMac Mortgage Investment is currently generating about 0.01 per unit of volatility. If you would invest  1,356  in PennyMac Mortgage Investment on September 2, 2024 and sell it today you would earn a total of  3.00  from holding PennyMac Mortgage Investment or generate 0.22% return on investment over 90 days.

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

Two Harbors Investments  vs.  PennyMac Mortgage Investment

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 uncertain performance in the last few months, the Stock's basic indicators remain very healthy which may send shares a bit higher in January 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

PennyMac Mortgage

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days PennyMac Mortgage Investment has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable primary indicators, PennyMac Mortgage is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Two Harbors and PennyMac Mortgage

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

The idea behind Two Harbors Investments and PennyMac Mortgage 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.