Correlation Between Equity Residential and AvalonBay Communities

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

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

Diversification Opportunities for Equity Residential and AvalonBay Communities

0.89

Correlation Coefficient

Equity Residential  AvalonBay Communities

Very poor diversification

The 3 months correlation between Equity and AvalonBay is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Equity Residential and AvalonBay Communities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AvalonBay Communities and Equity Residential 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 Equity Residential 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 Equity Residential i.e., Equity Residential and AvalonBay Communities go up and down completely randomly.

Pair Corralation between Equity Residential and AvalonBay Communities

Assuming the 90 days horizon Equity Residential is expected to generate 1.33 times less return on investment than AvalonBay Communities. In addition to that, Equity Residential is 1.05 times more volatile than AvalonBay Communities. It trades about 0.07 of its total potential returns per unit of risk. AvalonBay Communities is currently generating about 0.1 per unit of volatility. If you would invest  20,218  in AvalonBay Communities on September 5, 2024 and sell it today you would earn a total of  1,517  from holding AvalonBay Communities or generate 7.5% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.46%
Values	Daily Returns

Equity Residential  vs.  AvalonBay Communities

Equity Residential

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Residential are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Equity Residential is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

AvalonBay Communities

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in AvalonBay Communities are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, AvalonBay Communities may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Equity Residential and AvalonBay Communities

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

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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 Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.