Correlation Between American Homes and Extra Space

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

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

Diversification Opportunities for American Homes and Extra Space

0.71

Correlation Coefficient

American Homes  Extra Space

Poor diversification

The 3 months correlation between American and Extra is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding American Homes 4 and Extra Space Storage in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Extra Space Storage and American Homes 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 American Homes 4 are associated (or correlated) with Extra Space. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Extra Space Storage has no effect on the direction of American Homes i.e., American Homes and Extra Space go up and down completely randomly.

Pair Corralation between American Homes and Extra Space

Assuming the 90 days trading horizon American Homes 4 is expected to generate 0.82 times more return on investment than Extra Space. However, American Homes 4 is 1.22 times less risky than Extra Space. It trades about -0.06 of its potential returns per unit of risk. Extra Space Storage is currently generating about -0.14 per unit of risk. If you would invest  3,993  in American Homes 4 on September 18, 2024 and sell it today you would lose (205.00) from holding American Homes 4 or give up 5.13% of portfolio value over 90 days.

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

American Homes 4  vs.  Extra Space Storage

American Homes 4

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days American Homes 4 has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, American Homes is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Extra Space Storage

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Extra Space Storage has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of uncertain performance in the last few months, the Stock's basic indicators remain comparatively stable which may send shares a bit higher in January 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

Pair Trading with American Homes and Extra Space

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

The idea behind American Homes 4 and Extra Space Storage 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.