Correlation Between Target and American Homes

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

By analyzing existing cross correlation between Target and American Homes 4, you can compare the effects of market volatilities on Target and American Homes 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 Target with a short position of American Homes. Check out your portfolio center. Please also check ongoing floating volatility patterns of Target and American Homes.

Diversification Opportunities for Target and American Homes

0.38

Correlation Coefficient

Target  American Homes

Weak diversification

The 3 months correlation between Target and American is 0.38. Overlapping area represents the amount of risk that can be diversified away by holding Target and American Homes 4 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Homes 4 and Target 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 Target are associated (or correlated) with American Homes. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Homes 4 has no effect on the direction of Target i.e., Target and American Homes go up and down completely randomly.

Pair Corralation between Target and American Homes

Assuming the 90 days horizon Target is expected to under-perform the American Homes. In addition to that, Target is 1.09 times more volatile than American Homes 4. It trades about -0.21 of its total potential returns per unit of risk. American Homes 4 is currently generating about -0.03 per unit of volatility. If you would invest  3,490  in American Homes 4 on December 22, 2024 and sell it today you would lose (150.00) from holding American Homes 4 or give up 4.3% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.36%
Values	Daily Returns

Target  vs.  American Homes 4

Target

Risk-Adjusted Performance

Very Weak

Over the last 90 days Target has generated negative risk-adjusted returns adding no value to investors with long positions. Despite uncertain performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

American Homes 4

Risk-Adjusted Performance

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.

Pair Trading with Target and American Homes

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

The idea behind Target and American Homes 4 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 Portfolio Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.