Correlation Between American Homes and Verizon Communications

Can any of the company-specific risk be diversified away by investing in both American Homes and Verizon Communications 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 Verizon Communications 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 Verizon Communications, you can compare the effects of market volatilities on American Homes and Verizon Communications 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 Verizon Communications. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Homes and Verizon Communications.

Diversification Opportunities for American Homes and Verizon Communications

0.58

Correlation Coefficient

American Homes  Verizon Communications

Very weak diversification

The 3 months correlation between American and Verizon is 0.58. Overlapping area represents the amount of risk that can be diversified away by holding American Homes 4 and Verizon Communications in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Verizon Communications 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 Verizon Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Verizon Communications has no effect on the direction of American Homes i.e., American Homes and Verizon Communications go up and down completely randomly.

Pair Corralation between American Homes and Verizon Communications

Assuming the 90 days trading horizon American Homes 4 is expected to generate 1.29 times more return on investment than Verizon Communications. However, American Homes is 1.29 times more volatile than Verizon Communications. It trades about -0.09 of its potential returns per unit of risk. Verizon Communications is currently generating about -0.46 per unit of risk. If you would invest  3,786  in American Homes 4 on September 25, 2024 and sell it today you would lose (92.00) from holding American Homes 4 or give up 2.43% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	95.45%
Values	Daily Returns

American Homes 4  vs.  Verizon Communications

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.

Verizon Communications

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Verizon Communications has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unsteady performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Pair Trading with American Homes and Verizon Communications

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

The idea behind American Homes 4 and Verizon Communications 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .