Correlation Between Amazon and Equity Residential

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

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

Diversification Opportunities for Amazon and Equity Residential

0.75

Correlation Coefficient

Amazon  Equity Residential

Poor diversification

The 3 months correlation between Amazon and Equity is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Amazon Inc and Equity Residential in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Residential and Amazon 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 Amazon Inc are associated (or correlated) with Equity Residential. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Residential has no effect on the direction of Amazon i.e., Amazon and Equity Residential go up and down completely randomly.

Pair Corralation between Amazon and Equity Residential

Assuming the 90 days trading horizon Amazon Inc is expected to generate 1.05 times more return on investment than Equity Residential. However, Amazon is 1.05 times more volatile than Equity Residential. It trades about 0.11 of its potential returns per unit of risk. Equity Residential is currently generating about 0.09 per unit of risk. If you would invest  5,003  in Amazon Inc on October 13, 2024 and sell it today you would earn a total of  1,660  from holding Amazon Inc or generate 33.18% return on investment over 90 days.

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

Amazon Inc  vs.  Equity Residential

Amazon Inc

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Amazon Inc are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Amazon sustained solid returns over the last few months and may actually be approaching a breakup point.

Equity Residential

Risk-Adjusted Performance

6 of 100

Modest

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

Pair Trading with Amazon and Equity Residential

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

The idea behind Amazon Inc and Equity Residential 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.