Correlation Between Broadcom and AvalonBay Communities

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

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

Diversification Opportunities for Broadcom and AvalonBay Communities

0.43

Correlation Coefficient

Broadcom  AvalonBay Communities

Very weak diversification

The 3 months correlation between Broadcom and AvalonBay is 0.43. Overlapping area represents the amount of risk that can be diversified away by holding Broadcom and AvalonBay Communities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AvalonBay Communities and Broadcom 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 Broadcom are associated (or correlated) with AvalonBay Communities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AvalonBay Communities has no effect on the direction of Broadcom i.e., Broadcom and AvalonBay Communities go up and down completely randomly.

Pair Corralation between Broadcom and AvalonBay Communities

Assuming the 90 days trading horizon Broadcom is expected to generate 45.82 times more return on investment than AvalonBay Communities. However, Broadcom is 45.82 times more volatile than AvalonBay Communities. It trades about 0.09 of its potential returns per unit of risk. AvalonBay Communities is currently generating about 0.07 per unit of risk. If you would invest  371.00  in Broadcom on October 4, 2024 and sell it today you would earn a total of  1,679  from holding Broadcom or generate 452.56% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	87.53%
Values	Daily Returns

Broadcom  vs.  AvalonBay Communities

Broadcom

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Broadcom are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak technical and fundamental indicators, Broadcom sustained solid returns over the last few months and may actually be approaching a breakup point.

AvalonBay Communities

Risk-Adjusted Performance

0 of 100

OK

Over the last 90 days AvalonBay Communities has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat weak basic indicators, AvalonBay Communities sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Broadcom and AvalonBay Communities

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

The idea behind Broadcom and AvalonBay Communities 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.