Correlation Between American Homes and Ultra Clean

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

Diversification Opportunities for American Homes and Ultra Clean

0.23

Correlation Coefficient

American Homes  Ultra Clean

Modest diversification

The 3 months correlation between American and Ultra is 0.23. Overlapping area represents the amount of risk that can be diversified away by holding American Homes 4 and Ultra Clean Holdings in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ultra Clean Holdings 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 Ultra Clean. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ultra Clean Holdings has no effect on the direction of American Homes i.e., American Homes and Ultra Clean go up and down completely randomly.

Pair Corralation between American Homes and Ultra Clean

Assuming the 90 days trading horizon American Homes is expected to generate 2.49 times less return on investment than Ultra Clean. But when comparing it to its historical volatility, American Homes 4 is 1.76 times less risky than Ultra Clean. It trades about 0.02 of its potential returns per unit of risk. Ultra Clean Holdings is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  3,080  in Ultra Clean Holdings on October 24, 2024 and sell it today you would earn a total of  640.00  from holding Ultra Clean Holdings or generate 20.78% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	99.76%
Values	Daily Returns

American Homes 4  vs.  Ultra Clean Holdings

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.

Ultra Clean Holdings

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Ultra Clean Holdings are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Ultra Clean reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with American Homes and Ultra Clean

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

The idea behind American Homes 4 and Ultra Clean Holdings 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.