Correlation Between American Homes and Litigation Capital

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

Diversification Opportunities for American Homes and Litigation Capital

0.78

Correlation Coefficient

American Homes  Litigation Capital

Poor diversification

The 3 months correlation between American and Litigation is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding American Homes 4 and Litigation Capital Management in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Litigation Capital 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 Litigation Capital. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Litigation Capital has no effect on the direction of American Homes i.e., American Homes and Litigation Capital go up and down completely randomly.

Pair Corralation between American Homes and Litigation Capital

Assuming the 90 days trading horizon American Homes 4 is expected to generate 0.29 times more return on investment than Litigation Capital. However, American Homes 4 is 3.43 times less risky than Litigation Capital. It trades about -0.04 of its potential returns per unit of risk. Litigation Capital Management is currently generating about -0.39 per unit of risk. If you would invest  3,537  in American Homes 4 on November 29, 2024 and sell it today you would lose (38.00) from holding American Homes 4 or give up 1.07% of portfolio value over 90 days.

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

American Homes 4  vs.  Litigation Capital Management

American Homes 4

Risk-Adjusted Performance

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 latest uncertain 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.

Litigation Capital

Risk-Adjusted Performance

Very Weak

Over the last 90 days Litigation Capital Management has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of uncertain performance in the last few months, the Stock's technical and fundamental indicators remain rather sound which may send shares a bit higher in March 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with American Homes and Litigation Capital

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

The idea behind American Homes 4 and Litigation Capital Management 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.