Correlation Between American Homes and BP Prudhoe

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

Diversification Opportunities for American Homes and BP Prudhoe

0.06

Correlation Coefficient

American Homes  BP Prudhoe

Significant diversification

The 3 months correlation between American and BMI is 0.06. Overlapping area represents the amount of risk that can be diversified away by holding American Homes 4 and BP Prudhoe Bay in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BP Prudhoe Bay 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 BP Prudhoe. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BP Prudhoe Bay has no effect on the direction of American Homes i.e., American Homes and BP Prudhoe go up and down completely randomly.

Pair Corralation between American Homes and BP Prudhoe

Assuming the 90 days trading horizon American Homes 4 is expected to generate 0.31 times more return on investment than BP Prudhoe. However, American Homes 4 is 3.19 times less risky than BP Prudhoe. It trades about 0.02 of its potential returns per unit of risk. BP Prudhoe Bay is currently generating about -0.09 per unit of risk. If you would invest  2,981  in American Homes 4 on October 22, 2024 and sell it today you would earn a total of  439.00  from holding American Homes 4 or generate 14.73% return on investment over 90 days.

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

American Homes 4  vs.  BP Prudhoe Bay

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. Despite nearly stable basic indicators, American Homes is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

BP Prudhoe Bay

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days BP Prudhoe Bay has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with American Homes and BP Prudhoe

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

The idea behind American Homes 4 and BP Prudhoe Bay 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..