Correlation Between American Homes and Equity LifeStyle

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

Diversification Opportunities for American Homes and Equity LifeStyle

0.57

Correlation Coefficient

American Homes  Equity LifeStyle

Very weak diversification

The 3 months correlation between American and Equity is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding American Homes 4 and Equity LifeStyle Properties in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity LifeStyle Pro 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 Equity LifeStyle. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity LifeStyle Pro has no effect on the direction of American Homes i.e., American Homes and Equity LifeStyle go up and down completely randomly.

Pair Corralation between American Homes and Equity LifeStyle

Assuming the 90 days trading horizon American Homes 4 is expected to generate 1.62 times more return on investment than Equity LifeStyle. However, American Homes is 1.62 times more volatile than Equity LifeStyle Properties. It trades about -0.01 of its potential returns per unit of risk. Equity LifeStyle Properties is currently generating about -0.18 per unit of risk. If you would invest  3,515  in American Homes 4 on September 24, 2024 and sell it today you would lose (15.00) from holding American Homes 4 or give up 0.43% of portfolio value over 90 days.

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

American Homes 4  vs.  Equity LifeStyle Properties

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 newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Equity LifeStyle Pro

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Equity LifeStyle Properties has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Equity LifeStyle 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 Equity LifeStyle

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

The idea behind American Homes 4 and Equity LifeStyle Properties 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.