Correlation Between American Homes and Ecopetrol

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

Diversification Opportunities for American Homes and Ecopetrol

0.15

Correlation Coefficient

American Homes  Ecopetrol

Average diversification

The 3 months correlation between American and Ecopetrol is 0.15. Overlapping area represents the amount of risk that can be diversified away by holding American Homes 4 and Ecopetrol SA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ecopetrol SA 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 Ecopetrol. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ecopetrol SA has no effect on the direction of American Homes i.e., American Homes and Ecopetrol go up and down completely randomly.

Pair Corralation between American Homes and Ecopetrol

Assuming the 90 days trading horizon American Homes 4 is expected to generate 0.74 times more return on investment than Ecopetrol. However, American Homes 4 is 1.34 times less risky than Ecopetrol. It trades about 0.03 of its potential returns per unit of risk. Ecopetrol SA is currently generating about 0.0 per unit of risk. If you would invest  3,140  in American Homes 4 on October 4, 2024 and sell it today you would earn a total of  320.00  from holding American Homes 4 or generate 10.19% 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.  Ecopetrol SA

American Homes 4

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in American Homes 4 are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. 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.

Ecopetrol SA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Ecopetrol SA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable technical indicators, Ecopetrol is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with American Homes and Ecopetrol

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

The idea behind American Homes 4 and Ecopetrol SA 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.