Correlation Between American Homes and AvalonBay Communities
Can any of the company-specific risk be diversified away by investing in both American Homes and AvalonBay Communities 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 American Homes and AvalonBay Communities into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between American Homes 4 and AvalonBay Communities, you can compare the effects of market volatilities on American Homes and AvalonBay Communities 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 American Homes with a short position of AvalonBay Communities. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Homes and AvalonBay Communities.
Diversification Opportunities for American Homes and AvalonBay Communities
0.52 | Correlation Coefficient |
Very weak diversification
The 3 months correlation between American and AvalonBay is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding American Homes 4 and AvalonBay Communities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AvalonBay Communities and American Homes 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 American Homes 4 are associated (or correlated) with AvalonBay Communities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AvalonBay Communities has no effect on the direction of American Homes i.e., American Homes and AvalonBay Communities go up and down completely randomly.
Pair Corralation between American Homes and AvalonBay Communities
Assuming the 90 days trading horizon American Homes is expected to generate 4.29 times less return on investment than AvalonBay Communities. In addition to that, American Homes is 1.54 times more volatile than AvalonBay Communities. It trades about 0.02 of its total potential returns per unit of risk. AvalonBay Communities is currently generating about 0.1 per unit of volatility. If you would invest 20,297 in AvalonBay Communities on September 4, 2024 and sell it today you would earn a total of 1,628 from holding AvalonBay Communities or generate 8.02% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
American Homes 4 vs. AvalonBay Communities
Performance |
| Timeline |
| American Homes 4 |
| AvalonBay Communities |
American Homes and AvalonBay Communities Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with American Homes and AvalonBay Communities
The main advantage of trading using opposite American Homes and AvalonBay Communities positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if American Homes position performs unexpectedly, AvalonBay Communities 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 AvalonBay Communities will offset losses from the drop in AvalonBay Communities' long position.The idea behind American Homes 4 and AvalonBay Communities 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.
Other Complementary Tools
| Bond Analysis Evaluate and analyze corporate bonds as a potential investment for your portfolios. | |
| Fundamentals Comparison Compare fundamentals across multiple equities to find investing opportunities | |
| Pattern Recognition Use different Pattern Recognition models to time the market across multiple global exchanges | |
| Portfolio Comparator Compare the composition, asset allocations and performance of any two portfolios in your account | |
| Equity Forecasting Use basic forecasting models to generate price predictions and determine price momentum |