Correlation Between Weyerhaeuser and American Homes

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

By analyzing existing cross correlation between Weyerhaeuser and American Homes 4, you can compare the effects of market volatilities on Weyerhaeuser and American Homes 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 Weyerhaeuser with a short position of American Homes. Check out your portfolio center. Please also check ongoing floating volatility patterns of Weyerhaeuser and American Homes.

Diversification Opportunities for Weyerhaeuser and American Homes

0.66

Correlation Coefficient

Weyerhaeuser  American Homes

Poor diversification

The 3 months correlation between Weyerhaeuser and American is 0.66. Overlapping area represents the amount of risk that can be diversified away by holding Weyerhaeuser and American Homes 4 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Homes 4 and Weyerhaeuser 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 Weyerhaeuser are associated (or correlated) with American Homes. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Homes 4 has no effect on the direction of Weyerhaeuser i.e., Weyerhaeuser and American Homes go up and down completely randomly.

Pair Corralation between Weyerhaeuser and American Homes

Allowing for the 90-day total investment horizon Weyerhaeuser is expected to generate 1.92 times more return on investment than American Homes. However, Weyerhaeuser is 1.92 times more volatile than American Homes 4. It trades about 0.08 of its potential returns per unit of risk. American Homes 4 is currently generating about 0.05 per unit of risk. If you would invest  2,996  in Weyerhaeuser on September 4, 2024 and sell it today you would earn a total of  201.00  from holding Weyerhaeuser or generate 6.71% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.44%
Values	Daily Returns

Weyerhaeuser  vs.  American Homes 4

Weyerhaeuser

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Weyerhaeuser are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unfluctuating basic indicators, Weyerhaeuser may actually be approaching a critical reversion point that can send shares even higher in January 2025.

American Homes 4

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in American Homes 4 are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong technical indicators, American Homes is not utilizing all of its potentials. The recent stock price confusion, may contribute to short-horizon losses for the traders.

Pair Trading with Weyerhaeuser and American Homes

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

The idea behind Weyerhaeuser and American Homes 4 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.