Correlation Between Alliance Data and American Homes

Can any of the company-specific risk be diversified away by investing in both Alliance Data and American Homes 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 Alliance Data and American Homes into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Alliance Data Systems and American Homes 4, you can compare the effects of market volatilities on Alliance Data and American Homes 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 Alliance Data with a short position of American Homes. Check out your portfolio center. Please also check ongoing floating volatility patterns of Alliance Data and American Homes.

Diversification Opportunities for Alliance Data and American Homes

-0.07

Correlation Coefficient

Alliance Data  American Homes

Good diversification

The 3 months correlation between Alliance and American is -0.07. Overlapping area represents the amount of risk that can be diversified away by holding Alliance Data Systems and American Homes 4 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Homes 4 and Alliance Data 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 Alliance Data Systems are associated (or correlated) with American Homes. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Homes 4 has no effect on the direction of Alliance Data i.e., Alliance Data and American Homes go up and down completely randomly.

Pair Corralation between Alliance Data and American Homes

Assuming the 90 days trading horizon Alliance Data Systems is expected to generate 2.6 times more return on investment than American Homes. However, Alliance Data is 2.6 times more volatile than American Homes 4. It trades about 0.13 of its potential returns per unit of risk. American Homes 4 is currently generating about 0.04 per unit of risk. If you would invest  3,415  in Alliance Data Systems on October 9, 2024 and sell it today you would earn a total of  2,839  from holding Alliance Data Systems or generate 83.13% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	97.79%
Values	Daily Returns

Alliance Data Systems  vs.  American Homes 4

Alliance Data Systems

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Alliance Data Systems are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Alliance Data unveiled solid returns over the last few months and may actually be approaching a breakup point.

American Homes 4

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days American Homes 4 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, American Homes 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 Alliance Data and American Homes

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

The idea behind Alliance Data Systems and American Homes 4 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 Piotroski F Score module to get Piotroski F Score based on the binary analysis strategy of nine different fundamentals.