Correlation Between Essex Property and American Homes

Can any of the company-specific risk be diversified away by investing in both Essex Property 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 Essex Property and American Homes 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 American Homes 4, you can compare the effects of market volatilities on Essex Property 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 Essex Property with a short position of American Homes. Check out your portfolio center. Please also check ongoing floating volatility patterns of Essex Property and American Homes.

Diversification Opportunities for Essex Property and American Homes

0.3

Correlation Coefficient

Essex Property  American Homes

Weak diversification

The 3 months correlation between Essex and American is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Essex Property Trust 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 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 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 Essex Property i.e., Essex Property and American Homes go up and down completely randomly.

Pair Corralation between Essex Property and American Homes

Assuming the 90 days horizon Essex Property Trust is expected to generate 0.77 times more return on investment than American Homes. However, Essex Property Trust is 1.31 times less risky than American Homes. It trades about 0.06 of its potential returns per unit of risk. American Homes 4 is currently generating about -0.01 per unit of risk. If you would invest  28,640  in Essex Property Trust on December 1, 2024 and sell it today you would earn a total of  1,270  from holding Essex Property Trust or generate 4.43% return on investment over 90 days.

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

Essex Property Trust  vs.  American Homes 4

Essex Property Trust

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Essex Property Trust are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Essex Property is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the 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 newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Essex Property and American Homes

The main advantage of trading using opposite Essex Property and American Homes positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Essex Property 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 Essex Property Trust 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 Earnings Calls module to check upcoming earnings announcements updated hourly across public exchanges.