Correlation Between American Homes and Essex Property

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

Diversification Opportunities for American Homes and Essex Property

0.21

Correlation Coefficient

American Homes  Essex Property

Modest diversification

The 3 months correlation between American and Essex is 0.21. Overlapping area represents the amount of risk that can be diversified away by holding American Homes 4 and Essex Property Trust in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Essex Property Trust 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 Essex Property. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Essex Property Trust has no effect on the direction of American Homes i.e., American Homes and Essex Property go up and down completely randomly.

Pair Corralation between American Homes and Essex Property

Assuming the 90 days trading horizon American Homes is expected to generate 2.9 times less return on investment than Essex Property. In addition to that, American Homes is 1.3 times more volatile than Essex Property Trust. It trades about 0.02 of its total potential returns per unit of risk. Essex Property Trust is currently generating about 0.06 per unit of volatility. If you would invest  26,737  in Essex Property Trust on December 29, 2024 and sell it today you would earn a total of  1,403  from holding Essex Property Trust or generate 5.25% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.44%
Values	Daily Returns

American Homes 4  vs.  Essex Property Trust

American Homes 4

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in American Homes 4 are ranked lower than 1 (%) 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.

Essex Property Trust

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Essex Property Trust are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Essex Property 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 Essex Property

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

The idea behind American Homes 4 and Essex Property Trust 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.