Correlation Between American Homes and Melia Hotels

Can any of the company-specific risk be diversified away by investing in both American Homes and Melia Hotels 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 Melia Hotels 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 Melia Hotels, you can compare the effects of market volatilities on American Homes and Melia Hotels 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 Melia Hotels. Check out your portfolio center. Please also check ongoing floating volatility patterns of American Homes and Melia Hotels.

Diversification Opportunities for American Homes and Melia Hotels

-0.42

Correlation Coefficient

American Homes  Melia Hotels

Very good diversification

The 3 months correlation between American and Melia is -0.42. Overlapping area represents the amount of risk that can be diversified away by holding American Homes 4 and Melia Hotels in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Melia Hotels 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 Melia Hotels. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Melia Hotels has no effect on the direction of American Homes i.e., American Homes and Melia Hotels go up and down completely randomly.

Pair Corralation between American Homes and Melia Hotels

Assuming the 90 days trading horizon American Homes 4 is expected to under-perform the Melia Hotels. But the stock apears to be less risky and, when comparing its historical volatility, American Homes 4 is 1.01 times less risky than Melia Hotels. The stock trades about -0.07 of its potential returns per unit of risk. The Melia Hotels is currently generating about 0.17 of returns per unit of risk over similar time horizon. If you would invest  661.00  in Melia Hotels on September 19, 2024 and sell it today you would earn a total of  88.00  from holding Melia Hotels or generate 13.31% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	98.44%
Values	Daily Returns

American Homes 4  vs.  Melia Hotels

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.

Melia Hotels

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Melia Hotels are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Melia Hotels unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with American Homes and Melia Hotels

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

The idea behind American Homes 4 and Melia Hotels 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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.