Correlation Between American Homes and ABB

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

Diversification Opportunities for American Homes and ABB

-0.08

Correlation Coefficient

American Homes  ABB

Good diversification

The 3 months correlation between American and ABB is -0.08. Overlapping area represents the amount of risk that can be diversified away by holding American Homes 4 and ABB in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ABB 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 ABB. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ABB has no effect on the direction of American Homes i.e., American Homes and ABB go up and down completely randomly.

Pair Corralation between American Homes and ABB

Assuming the 90 days trading horizon American Homes is expected to generate 5.34 times less return on investment than ABB. But when comparing it to its historical volatility, American Homes 4 is 1.12 times less risky than ABB. It trades about 0.02 of its potential returns per unit of risk. ABB is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  5,000  in ABB on September 4, 2024 and sell it today you would earn a total of  450.00  from holding ABB or generate 9.0% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.46%
Values	Daily Returns

American Homes 4  vs.  ABB

American Homes 4

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in American Homes 4 are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. 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.

ABB

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in ABB are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile forward-looking indicators, ABB may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with American Homes and ABB

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

The idea behind American Homes 4 and ABB 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.