Correlation Between American Public and American Homes

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

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

Diversification Opportunities for American Public and American Homes

0.55

Correlation Coefficient

American Public  American Homes

Very weak diversification

The 3 months correlation between American and American is 0.55. Overlapping area represents the amount of risk that can be diversified away by holding American Public Education 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 American Public 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 Public Education 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 American Public i.e., American Public and American Homes go up and down completely randomly.

Pair Corralation between American Public and American Homes

Assuming the 90 days horizon American Public Education is expected to generate 2.96 times more return on investment than American Homes. However, American Public is 2.96 times more volatile than American Homes 4. It trades about 0.05 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  1,250  in American Public Education on September 29, 2024 and sell it today you would earn a total of  810.00  from holding American Public Education or generate 64.8% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	100.0%
Values	Daily Returns

American Public Education  vs.  American Homes 4

American Public Education

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in American Public Education are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, American Public reported solid returns over the last few months and may actually be approaching a breakup point.

American Homes 4

Risk-Adjusted Performance

5 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in American Homes 4 are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, American Homes may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with American Public and American Homes

The main advantage of trading using opposite American Public and American Homes positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if American Public 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 American Public Education 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.

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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.