Correlation Between Prudential Financial and AvalonBay Communities

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

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

Diversification Opportunities for Prudential Financial and AvalonBay Communities

0.87

Correlation Coefficient

Prudential Financial  AvalonBay Communities

Very poor diversification

The 3 months correlation between Prudential and AvalonBay is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Prudential Financial and AvalonBay Communities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AvalonBay Communities and Prudential Financial 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 Prudential Financial 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 Prudential Financial i.e., Prudential Financial and AvalonBay Communities go up and down completely randomly.

Pair Corralation between Prudential Financial and AvalonBay Communities

Assuming the 90 days trading horizon Prudential Financial is expected to generate 0.68 times more return on investment than AvalonBay Communities. However, Prudential Financial is 1.47 times less risky than AvalonBay Communities. It trades about 0.11 of its potential returns per unit of risk. AvalonBay Communities is currently generating about -0.01 per unit of risk. If you would invest  37,296  in Prudential Financial on September 27, 2024 and sell it today you would earn a total of  1,194  from holding Prudential Financial or generate 3.2% return on investment over 90 days.

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

Prudential Financial  vs.  AvalonBay Communities

Prudential Financial

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Prudential Financial are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak fundamental indicators, Prudential Financial sustained solid returns over the last few months and may actually be approaching a breakup point.

AvalonBay Communities

Risk-Adjusted Performance

8 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in AvalonBay Communities are ranked lower than 8 (%) 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 January 2025.

Pair Trading with Prudential Financial and AvalonBay Communities

The main advantage of trading using opposite Prudential Financial and AvalonBay Communities positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Prudential Financial 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 Prudential Financial 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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.