Correlation Between American Homes and Federal Home

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

Diversification Opportunities for American Homes and Federal Home

0.63

Correlation Coefficient

American Homes  Federal Home

Poor diversification

The 3 months correlation between American and Federal is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding American Homes 4 and Federal Home Loan in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Federal Home Loan 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 Federal Home. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Federal Home Loan has no effect on the direction of American Homes i.e., American Homes and Federal Home go up and down completely randomly.

Pair Corralation between American Homes and Federal Home

Assuming the 90 days trading horizon American Homes 4 is expected to generate 0.22 times more return on investment than Federal Home. However, American Homes 4 is 4.49 times less risky than Federal Home. It trades about -0.05 of its potential returns per unit of risk. Federal Home Loan is currently generating about -0.07 per unit of risk. If you would invest  3,574  in American Homes 4 on September 23, 2024 and sell it today you would lose (74.00) from holding American Homes 4 or give up 2.07% of portfolio value over 90 days.

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

American Homes 4  vs.  Federal Home Loan

American Homes 4

Risk-Adjusted Performance

1 of 100

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.

Federal Home Loan

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Federal Home Loan are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Federal Home reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with American Homes and Federal Home

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

The idea behind American Homes 4 and Federal Home Loan 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.