Correlation Between Western Asset and Metropolitan West

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Can any of the company-specific risk be diversified away by investing in both Western Asset and Metropolitan West 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 Western Asset and Metropolitan West into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Western Asset Mortgage and Metropolitan West Total, you can compare the effects of market volatilities on Western Asset and Metropolitan West 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 Western Asset with a short position of Metropolitan West. Check out your portfolio center. Please also check ongoing floating volatility patterns of Western Asset and Metropolitan West.

Diversification Opportunities for Western Asset and Metropolitan West

1.0
  Correlation Coefficient

No risk reduction

The 3 months correlation between Western and Metropolitan is 1.0. Overlapping area represents the amount of risk that can be diversified away by holding Western Asset Mortgage and Metropolitan West Total in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Metropolitan West Total and Western Asset 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 Western Asset Mortgage are associated (or correlated) with Metropolitan West. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Metropolitan West Total has no effect on the direction of Western Asset i.e., Western Asset and Metropolitan West go up and down completely randomly.

Pair Corralation between Western Asset and Metropolitan West

Assuming the 90 days horizon Western Asset is expected to generate 1.02 times less return on investment than Metropolitan West. But when comparing it to its historical volatility, Western Asset Mortgage is 1.2 times less risky than Metropolitan West. It trades about 0.2 of its potential returns per unit of risk. Metropolitan West Total is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  897.00  in Metropolitan West Total on September 13, 2024 and sell it today you would earn a total of  10.00  from holding Metropolitan West Total or generate 1.11% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy100.0%
ValuesDaily Returns

Western Asset Mortgage  vs.  Metropolitan West Total

 Performance 
       Timeline  
Western Asset Mortgage 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days Western Asset Mortgage has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Western Asset is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.
Metropolitan West Total 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days Metropolitan West Total has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Metropolitan West is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Western Asset and Metropolitan West Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Western Asset and Metropolitan West

The main advantage of trading using opposite Western Asset and Metropolitan West positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Western Asset position performs unexpectedly, Metropolitan West 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 Metropolitan West will offset losses from the drop in Metropolitan West's long position.
The idea behind Western Asset Mortgage and Metropolitan West Total 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.

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