Correlation Between AvalonBay Communities and Equity Residential

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

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

Diversification Opportunities for AvalonBay Communities and Equity Residential

0.89

Correlation Coefficient

AvalonBay Communities  Equity Residential

Very poor diversification

The 3 months correlation between AvalonBay and Equity is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding AvalonBay Communities and Equity Residential in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Residential and AvalonBay Communities 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 AvalonBay Communities are associated (or correlated) with Equity Residential. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Residential has no effect on the direction of AvalonBay Communities i.e., AvalonBay Communities and Equity Residential go up and down completely randomly.

Pair Corralation between AvalonBay Communities and Equity Residential

Assuming the 90 days horizon AvalonBay Communities is expected to generate 0.95 times more return on investment than Equity Residential. However, AvalonBay Communities is 1.06 times less risky than Equity Residential. It trades about 0.09 of its potential returns per unit of risk. Equity Residential is currently generating about 0.07 per unit of risk. If you would invest  20,218  in AvalonBay Communities on September 5, 2024 and sell it today you would earn a total of  1,517  from holding AvalonBay Communities or generate 7.5% return on investment over 90 days.

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

AvalonBay Communities  vs.  Equity Residential

AvalonBay Communities

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in AvalonBay Communities are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, AvalonBay Communities may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Equity Residential

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Equity Residential are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Equity Residential is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with AvalonBay Communities and Equity Residential

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

The idea behind AvalonBay Communities and Equity Residential 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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.