Correlation Between Essex Property and Equity Residential

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

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

Diversification Opportunities for Essex Property and Equity Residential

0.71

Correlation Coefficient

Essex Property  Equity Residential

Poor diversification

The 3 months correlation between Essex and Equity is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Essex Property Trust and Equity Residential in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Residential and Essex Property 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 Essex Property Trust 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 Essex Property i.e., Essex Property and Equity Residential go up and down completely randomly.

Pair Corralation between Essex Property and Equity Residential

Assuming the 90 days trading horizon Essex Property Trust is expected to under-perform the Equity Residential. But the stock apears to be less risky and, when comparing its historical volatility, Essex Property Trust is 2.03 times less risky than Equity Residential. The stock trades about -0.04 of its potential returns per unit of risk. The Equity Residential is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  20,240  in Equity Residential on September 24, 2024 and sell it today you would earn a total of  1,980  from holding Equity Residential or generate 9.78% return on investment over 90 days.

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

Essex Property Trust  vs.  Equity Residential

Essex Property Trust

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Essex Property Trust are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Essex Property is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Equity Residential

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Residential are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Equity Residential may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Essex Property and Equity Residential

The main advantage of trading using opposite Essex Property and Equity Residential positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Essex Property 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 Essex Property Trust 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.

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 Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.