Correlation Between American Homes and Auto Trader

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

Diversification Opportunities for American Homes and Auto Trader

-0.01

Correlation Coefficient

American Homes  Auto Trader

Good diversification

The 3 months correlation between American and Auto is -0.01. Overlapping area represents the amount of risk that can be diversified away by holding American Homes 4 and Auto Trader Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Auto Trader Group 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 Auto Trader. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Auto Trader Group has no effect on the direction of American Homes i.e., American Homes and Auto Trader go up and down completely randomly.

Pair Corralation between American Homes and Auto Trader

Assuming the 90 days trading horizon American Homes is expected to generate 3.74 times less return on investment than Auto Trader. In addition to that, American Homes is 1.59 times more volatile than Auto Trader Group. It trades about 0.04 of its total potential returns per unit of risk. Auto Trader Group is currently generating about 0.24 per unit of volatility. If you would invest  950.00  in Auto Trader Group on September 13, 2024 and sell it today you would earn a total of  50.00  from holding Auto Trader Group or generate 5.26% return on investment over 90 days.

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

American Homes 4  vs.  Auto Trader Group

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. Despite nearly stable basic indicators, American Homes is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Auto Trader Group

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Auto Trader Group has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Auto Trader is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with American Homes and Auto Trader

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

The idea behind American Homes 4 and Auto Trader Group 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.