Correlation Between Extra Space and American Homes

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

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

Diversification Opportunities for Extra Space and American Homes

0.77

Correlation Coefficient

Extra Space  American Homes

Poor diversification

The 3 months correlation between Extra and American is 0.77. Overlapping area represents the amount of risk that can be diversified away by holding Extra Space Storage 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 Extra Space 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 Extra Space Storage 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 Extra Space i.e., Extra Space and American Homes go up and down completely randomly.

Pair Corralation between Extra Space and American Homes

Assuming the 90 days trading horizon Extra Space Storage is expected to under-perform the American Homes. In addition to that, Extra Space is 1.27 times more volatile than American Homes 4. It trades about -0.11 of its total potential returns per unit of risk. American Homes 4 is currently generating about -0.09 per unit of volatility. If you would invest  4,089  in American Homes 4 on September 14, 2024 and sell it today you would lose (282.00) from holding American Homes 4 or give up 6.9% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	96.92%
Values	Daily Returns

Extra Space Storage  vs.  American Homes 4

Extra Space Storage

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Extra Space Storage 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.

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 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 Extra Space and American Homes

The main advantage of trading using opposite Extra Space and American Homes positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Extra Space 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 Extra Space Storage 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 Commodity Channel module to use Commodity Channel Index to analyze current equity momentum.