Correlation Between Essex Property and AvalonBay Communities

Can any of the company-specific risk be diversified away by investing in both Essex Property 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 Essex Property and AvalonBay Communities 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 AvalonBay Communities, you can compare the effects of market volatilities on Essex Property 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 Essex Property with a short position of AvalonBay Communities. Check out your portfolio center. Please also check ongoing floating volatility patterns of Essex Property and AvalonBay Communities.

Diversification Opportunities for Essex Property and AvalonBay Communities

0.95

Correlation Coefficient

Essex Property  AvalonBay Communities

Almost no diversification

The 3 months correlation between Essex and AvalonBay is 0.95. Overlapping area represents the amount of risk that can be diversified away by holding Essex Property Trust and AvalonBay Communities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AvalonBay Communities 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 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 Essex Property i.e., Essex Property and AvalonBay Communities go up and down completely randomly.

Pair Corralation between Essex Property and AvalonBay Communities

Considering the 90-day investment horizon Essex Property Trust is expected to under-perform the AvalonBay Communities. In addition to that, Essex Property is 1.2 times more volatile than AvalonBay Communities. It trades about -0.18 of its total potential returns per unit of risk. AvalonBay Communities is currently generating about -0.18 per unit of volatility. If you would invest  23,041  in AvalonBay Communities on October 11, 2024 and sell it today you would lose (1,804) from holding AvalonBay Communities or give up 7.83% of portfolio value over 90 days.

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

Essex Property Trust  vs.  AvalonBay Communities

Essex Property Trust

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Essex Property Trust has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Essex Property is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

AvalonBay Communities

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days AvalonBay Communities has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, AvalonBay Communities is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Essex Property and AvalonBay Communities

The main advantage of trading using opposite Essex Property and AvalonBay Communities positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Essex Property 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 Essex Property Trust 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.