Correlation Between London Security and American Homes

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

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

Diversification Opportunities for London Security and American Homes

-0.01

Correlation Coefficient

London Security  American Homes

Good diversification

The 3 months correlation between London and American is -0.01. Overlapping area represents the amount of risk that can be diversified away by holding London Security Plc 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 London Security 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 London Security Plc 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 London Security i.e., London Security and American Homes go up and down completely randomly.

Pair Corralation between London Security and American Homes

Assuming the 90 days trading horizon London Security Plc is expected to under-perform the American Homes. In addition to that, London Security is 1.15 times more volatile than American Homes 4. It trades about -0.09 of its total potential returns per unit of risk. American Homes 4 is currently generating about -0.02 per unit of volatility. If you would invest  3,789  in American Homes 4 on October 3, 2024 and sell it today you would lose (68.00) from holding American Homes 4 or give up 1.79% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.39%
Values	Daily Returns

London Security Plc  vs.  American Homes 4

London Security Plc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days London Security Plc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's technical and fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

American Homes 4

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days American Homes 4 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, American Homes is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with London Security and American Homes

The main advantage of trading using opposite London Security and American Homes positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if London Security 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 London Security Plc 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.