Correlation Between American Homes and ELECTRONIC ARTS

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

Diversification Opportunities for American Homes and ELECTRONIC ARTS

0.18

Correlation Coefficient

American Homes  ELECTRONIC ARTS

Average diversification

The 3 months correlation between American and ELECTRONIC is 0.18. Overlapping area represents the amount of risk that can be diversified away by holding American Homes 4 and ELECTRONIC ARTS in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ELECTRONIC ARTS 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 ELECTRONIC ARTS. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ELECTRONIC ARTS has no effect on the direction of American Homes i.e., American Homes and ELECTRONIC ARTS go up and down completely randomly.

Pair Corralation between American Homes and ELECTRONIC ARTS

Assuming the 90 days trading horizon American Homes is expected to generate 13.3 times less return on investment than ELECTRONIC ARTS. In addition to that, American Homes is 1.62 times more volatile than ELECTRONIC ARTS. It trades about 0.01 of its total potential returns per unit of risk. ELECTRONIC ARTS is currently generating about 0.23 per unit of volatility. If you would invest  13,216  in ELECTRONIC ARTS on September 5, 2024 and sell it today you would earn a total of  2,570  from holding ELECTRONIC ARTS or generate 19.45% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	98.46%
Values	Daily Returns

American Homes 4  vs.  ELECTRONIC ARTS

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.

ELECTRONIC ARTS

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in ELECTRONIC ARTS are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, ELECTRONIC ARTS exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with American Homes and ELECTRONIC ARTS

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

The idea behind American Homes 4 and ELECTRONIC ARTS 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.