Correlation Between MP Materials and AvalonBay Communities

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

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

Diversification Opportunities for MP Materials and AvalonBay Communities

0.73

Correlation Coefficient

MP Materials  AvalonBay Communities

Poor diversification

The 3 months correlation between M2PM34 and AvalonBay is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding MP Materials Corp and AvalonBay Communities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AvalonBay Communities and MP Materials 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 MP Materials Corp 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 MP Materials i.e., MP Materials and AvalonBay Communities go up and down completely randomly.

Pair Corralation between MP Materials and AvalonBay Communities

Assuming the 90 days trading horizon MP Materials Corp is expected to under-perform the AvalonBay Communities. In addition to that, MP Materials is 4.22 times more volatile than AvalonBay Communities. It trades about -0.05 of its total potential returns per unit of risk. AvalonBay Communities is currently generating about -0.2 per unit of volatility. If you would invest  34,173  in AvalonBay Communities on October 9, 2024 and sell it today you would lose (2,167) from holding AvalonBay Communities or give up 6.34% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	94.44%
Values	Daily Returns

MP Materials Corp  vs.  AvalonBay Communities

MP Materials Corp

Risk-Adjusted Performance

9 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in MP Materials Corp are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, MP Materials sustained solid returns over the last few months and may actually be approaching a breakup point.

AvalonBay Communities

Risk-Adjusted Performance

5 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in AvalonBay Communities are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, AvalonBay Communities may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with MP Materials and AvalonBay Communities

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

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 Financial Widgets module to easily integrated Macroaxis content with over 30 different plug-and-play financial widgets.