Correlation Between Real Estate and Third Avenue

Can any of the company-specific risk be diversified away by investing in both Real Estate and Third Avenue 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 Real Estate and Third Avenue into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Real Estate Fund and Third Avenue Real, you can compare the effects of market volatilities on Real Estate and Third Avenue 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 Real Estate with a short position of Third Avenue. Check out your portfolio center. Please also check ongoing floating volatility patterns of Real Estate and Third Avenue.

Diversification Opportunities for Real Estate and Third Avenue

0.62

Correlation Coefficient

Real Estate  Third Avenue

Poor diversification

The 3 months correlation between Real and Third is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding Real Estate Fund and Third Avenue Real in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Third Avenue Real and Real Estate 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 Real Estate Fund are associated (or correlated) with Third Avenue. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Third Avenue Real has no effect on the direction of Real Estate i.e., Real Estate and Third Avenue go up and down completely randomly.

Pair Corralation between Real Estate and Third Avenue

Assuming the 90 days horizon Real Estate is expected to generate 1.09 times less return on investment than Third Avenue. But when comparing it to its historical volatility, Real Estate Fund is 1.04 times less risky than Third Avenue. It trades about 0.03 of its potential returns per unit of risk. Third Avenue Real is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  2,301  in Third Avenue Real on December 20, 2024 and sell it today you would earn a total of  45.00  from holding Third Avenue Real or generate 1.96% return on investment over 90 days.

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

Real Estate Fund  vs.  Third Avenue Real

Real Estate Fund

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Real Estate Fund are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Real Estate is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Third Avenue Real

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Third Avenue Real are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Third Avenue is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Real Estate and Third Avenue

The main advantage of trading using opposite Real Estate and Third Avenue positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Real Estate position performs unexpectedly, Third Avenue 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 Third Avenue will offset losses from the drop in Third Avenue's long position.

The idea behind Real Estate Fund and Third Avenue Real 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.