Correlation Between Essex Property and AvalonBay Communities
Can any of the company-specific risk be diversified away by investing in both Essex Property 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 Essex Property and AvalonBay Communities into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Essex Property Trust and AvalonBay Communities, you can compare the effects of market volatilities on Essex Property 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 Essex Property with a short position of AvalonBay Communities. Check out your portfolio center. Please also check ongoing floating volatility patterns of Essex Property and AvalonBay Communities.
Diversification Opportunities for Essex Property and AvalonBay Communities
0.82 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Essex and AvalonBay is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Essex Property Trust and AvalonBay Communities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AvalonBay Communities and Essex 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 Essex Property Trust 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 Essex Property i.e., Essex Property and AvalonBay Communities go up and down completely randomly.
Pair Corralation between Essex Property and AvalonBay Communities
Assuming the 90 days trading horizon Essex Property Trust is expected to generate 0.92 times more return on investment than AvalonBay Communities. However, Essex Property Trust is 1.09 times less risky than AvalonBay Communities. It trades about 0.17 of its potential returns per unit of risk. AvalonBay Communities is currently generating about 0.15 per unit of risk. If you would invest 13,958 in Essex Property Trust on September 5, 2024 and sell it today you would earn a total of 5,327 from holding Essex Property Trust or generate 38.16% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 99.21% |
| Values | Daily Returns |
Essex Property Trust vs. AvalonBay Communities
Performance |
| Timeline |
| Essex Property Trust |
| AvalonBay Communities |
Essex Property and AvalonBay Communities Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Essex Property and AvalonBay Communities
The main advantage of trading using opposite Essex Property and AvalonBay Communities positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Essex Property 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 Essex Property Trust 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.| AvalonBay Communities vs. Unity Software | AvalonBay Communities vs. Hospital Mater Dei | AvalonBay Communities vs. Palantir Technologies | AvalonBay Communities vs. Uber Technologies |
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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.
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