Correlation Between PennyMac Mortgage and Prospect Capital

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

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

Diversification Opportunities for PennyMac Mortgage and Prospect Capital

0.93

Correlation Coefficient

PennyMac Mortgage  Prospect Capital

Almost no diversification

The 3 months correlation between PennyMac and Prospect is 0.93. Overlapping area represents the amount of risk that can be diversified away by holding PennyMac Mortgage Investment and Prospect Capital in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prospect Capital and PennyMac Mortgage 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 PennyMac Mortgage Investment are associated (or correlated) with Prospect Capital. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prospect Capital has no effect on the direction of PennyMac Mortgage i.e., PennyMac Mortgage and Prospect Capital go up and down completely randomly.

Pair Corralation between PennyMac Mortgage and Prospect Capital

Assuming the 90 days trading horizon PennyMac Mortgage is expected to generate 3.01 times less return on investment than Prospect Capital. But when comparing it to its historical volatility, PennyMac Mortgage Investment is 2.09 times less risky than Prospect Capital. It trades about 0.12 of its potential returns per unit of risk. Prospect Capital is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  1,965  in Prospect Capital on July 15, 2024 and sell it today you would earn a total of  120.00  from holding Prospect Capital or generate 6.11% return on investment over 90 days.

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

PennyMac Mortgage Investment  vs.  Prospect Capital

PennyMac Mortgage

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in PennyMac Mortgage Investment are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, PennyMac Mortgage may actually be approaching a critical reversion point that can send shares even higher in November 2024.

Prospect Capital

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Prospect Capital are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite somewhat unsteady basic indicators, Prospect Capital sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with PennyMac Mortgage and Prospect Capital

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

The idea behind PennyMac Mortgage Investment and Prospect Capital 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 Stocks Directory module to find actively traded stocks across global markets.