Correlation Between American Financial and HCI

Can any of the company-specific risk be diversified away by investing in both American Financial and HCI 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 Financial and HCI into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between American Financial Group and HCI Group, you can compare the effects of market volatilities on American Financial and HCI 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 Financial with a short position of HCI. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Financial and HCI.

Diversification Opportunities for American Financial and HCI

0.28

Correlation Coefficient

American Financial  HCI

Modest diversification

The 3 months correlation between American and HCI is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding American Financial Group and HCI Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on HCI Group and American Financial 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 Financial Group are associated (or correlated) with HCI. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of HCI Group has no effect on the direction of American Financial i.e., American Financial and HCI go up and down completely randomly.

Pair Corralation between American Financial and HCI

Considering the 90-day investment horizon American Financial is expected to generate 2.13 times less return on investment than HCI. But when comparing it to its historical volatility, American Financial Group is 2.49 times less risky than HCI. It trades about 0.16 of its potential returns per unit of risk. HCI Group is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  9,423  in HCI Group on September 2, 2024 and sell it today you would earn a total of  2,764  from holding HCI Group or generate 29.33% return on investment over 90 days.

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

American Financial Group  vs.  HCI Group

American Financial

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in American Financial Group are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite nearly inconsistent technical and fundamental indicators, American Financial reported solid returns over the last few months and may actually be approaching a breakup point.

HCI Group

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in HCI Group are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite fairly unsteady fundamental indicators, HCI demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with American Financial and HCI

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

The idea behind American Financial Group and HCI Group 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.