Correlation Between Steel Dynamics and Essex Property

Can any of the company-specific risk be diversified away by investing in both Steel Dynamics and Essex Property 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 Steel Dynamics and Essex Property into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Steel Dynamics and Essex Property Trust, you can compare the effects of market volatilities on Steel Dynamics and Essex Property 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 Steel Dynamics with a short position of Essex Property. Check out your portfolio center. Please also check ongoing floating volatility patterns of Steel Dynamics and Essex Property.

Diversification Opportunities for Steel Dynamics and Essex Property

0.49

Correlation Coefficient

Steel Dynamics  Essex Property

Very weak diversification

The 3 months correlation between Steel and Essex is 0.49. Overlapping area represents the amount of risk that can be diversified away by holding Steel Dynamics and Essex Property Trust in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Essex Property Trust and Steel Dynamics 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 Steel Dynamics are associated (or correlated) with Essex Property. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Essex Property Trust has no effect on the direction of Steel Dynamics i.e., Steel Dynamics and Essex Property go up and down completely randomly.

Pair Corralation between Steel Dynamics and Essex Property

Given the investment horizon of 90 days Steel Dynamics is expected to generate 1.88 times less return on investment than Essex Property. In addition to that, Steel Dynamics is 1.53 times more volatile than Essex Property Trust. It trades about 0.03 of its total potential returns per unit of risk. Essex Property Trust is currently generating about 0.09 per unit of volatility. If you would invest  21,699  in Essex Property Trust on September 13, 2024 and sell it today you would earn a total of  6,671  from holding Essex Property Trust or generate 30.74% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.02%
Values	Daily Returns

Steel Dynamics  vs.  Essex Property Trust

Steel Dynamics

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Steel Dynamics are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile essential indicators, Steel Dynamics exhibited solid returns over the last few months and may actually be approaching a breakup point.

Essex Property Trust

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Essex Property Trust are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Essex Property is not utilizing all of its potentials. The newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Steel Dynamics and Essex Property

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

The idea behind Steel Dynamics and Essex Property Trust 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.