Correlation Between Western Digital and AvalonBay Communities

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

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

Diversification Opportunities for Western Digital and AvalonBay Communities

0.54

Correlation Coefficient

Western Digital  AvalonBay Communities

Very weak diversification

The 3 months correlation between Western and AvalonBay is 0.54. Overlapping area represents the amount of risk that can be diversified away by holding Western Digital and AvalonBay Communities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AvalonBay Communities and Western Digital 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 Western Digital 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 Western Digital i.e., Western Digital and AvalonBay Communities go up and down completely randomly.

Pair Corralation between Western Digital and AvalonBay Communities

Assuming the 90 days trading horizon Western Digital is expected to generate 2.0 times less return on investment than AvalonBay Communities. In addition to that, Western Digital is 1.63 times more volatile than AvalonBay Communities. It trades about 0.04 of its total potential returns per unit of risk. AvalonBay Communities is currently generating about 0.11 per unit of volatility. If you would invest  29,884  in AvalonBay Communities on October 6, 2024 and sell it today you would earn a total of  3,466  from holding AvalonBay Communities or generate 11.6% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	98.31%
Values	Daily Returns

Western Digital  vs.  AvalonBay Communities

Western Digital

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Western Digital are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak fundamental indicators, Western Digital may actually be approaching a critical reversion point that can send shares even higher in February 2025.

AvalonBay Communities

Risk-Adjusted Performance

9 of 100

OK

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

Pair Trading with Western Digital and AvalonBay Communities

The main advantage of trading using opposite Western Digital and AvalonBay Communities positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Western Digital 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 Western Digital 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.