Correlation Between AvalonBay Communities and Prudential Financial

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

By analyzing existing cross correlation between AvalonBay Communities and Prudential Financial, you can compare the effects of market volatilities on AvalonBay Communities and Prudential Financial 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 AvalonBay Communities with a short position of Prudential Financial. Check out your portfolio center. Please also check ongoing floating volatility patterns of AvalonBay Communities and Prudential Financial.

Diversification Opportunities for AvalonBay Communities and Prudential Financial

0.87

Correlation Coefficient

AvalonBay Communities  Prudential Financial

Very poor diversification

The 3 months correlation between AvalonBay and Prudential is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding AvalonBay Communities and Prudential Financial in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prudential Financial and AvalonBay Communities 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 AvalonBay Communities are associated (or correlated) with Prudential Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prudential Financial has no effect on the direction of AvalonBay Communities i.e., AvalonBay Communities and Prudential Financial go up and down completely randomly.

Pair Corralation between AvalonBay Communities and Prudential Financial

Assuming the 90 days trading horizon AvalonBay Communities is expected to under-perform the Prudential Financial. In addition to that, AvalonBay Communities is 1.47 times more volatile than Prudential Financial. It trades about -0.01 of its total potential returns per unit of risk. Prudential Financial is currently generating about 0.11 per unit of volatility. If you would invest  37,296  in Prudential Financial on September 27, 2024 and sell it today you would earn a total of  1,194  from holding Prudential Financial or generate 3.2% return on investment over 90 days.

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

AvalonBay Communities  vs.  Prudential Financial

AvalonBay Communities

Risk-Adjusted Performance

8 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in AvalonBay Communities are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, AvalonBay Communities may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Prudential Financial

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Prudential Financial are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak fundamental indicators, Prudential Financial sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with AvalonBay Communities and Prudential Financial

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

The idea behind AvalonBay Communities and Prudential Financial 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 Financial Widgets module to easily integrated Macroaxis content with over 30 different plug-and-play financial widgets.