Correlation Between Equity LifeStyle and American Homes

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

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

Diversification Opportunities for Equity LifeStyle and American Homes

0.57

Correlation Coefficient

Equity LifeStyle  American Homes

Very weak diversification

The 3 months correlation between Equity and American is 0.57. Overlapping area represents the amount of risk that can be diversified away by holding Equity LifeStyle Properties 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 Equity LifeStyle 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 LifeStyle Properties 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 Equity LifeStyle i.e., Equity LifeStyle and American Homes go up and down completely randomly.

Pair Corralation between Equity LifeStyle and American Homes

Assuming the 90 days horizon Equity LifeStyle Properties is expected to under-perform the American Homes. But the stock apears to be less risky and, when comparing its historical volatility, Equity LifeStyle Properties is 1.62 times less risky than American Homes. The stock trades about -0.18 of its potential returns per unit of risk. The American Homes 4 is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  3,515  in American Homes 4 on September 24, 2024 and sell it today you would lose (15.00) from holding American Homes 4 or give up 0.43% of portfolio value over 90 days.

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

Equity LifeStyle Properties  vs.  American Homes 4

Equity LifeStyle Pro

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Equity LifeStyle Properties has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Equity LifeStyle 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

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. Despite nearly stable basic indicators, American Homes is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Equity LifeStyle and American Homes

The main advantage of trading using opposite Equity LifeStyle and American Homes positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Equity LifeStyle 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 Equity LifeStyle Properties 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.

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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.