Correlation Between American Homes and Selective Insurance

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

Diversification Opportunities for American Homes and Selective Insurance

0.5

Correlation Coefficient

American Homes  Selective Insurance

Very weak diversification

The 3 months correlation between American and Selective is 0.5. Overlapping area represents the amount of risk that can be diversified away by holding American Homes 4 and Selective Insurance Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Selective Insurance 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 Selective Insurance. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Selective Insurance has no effect on the direction of American Homes i.e., American Homes and Selective Insurance go up and down completely randomly.

Pair Corralation between American Homes and Selective Insurance

Assuming the 90 days trading horizon American Homes is expected to generate 12.54 times less return on investment than Selective Insurance. In addition to that, American Homes is 1.05 times more volatile than Selective Insurance Group. It trades about 0.01 of its total potential returns per unit of risk. Selective Insurance Group is currently generating about 0.07 per unit of volatility. If you would invest  8,167  in Selective Insurance Group on September 24, 2024 and sell it today you would earn a total of  633.00  from holding Selective Insurance Group or generate 7.75% return on investment over 90 days.

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

American Homes 4  vs.  Selective Insurance Group

American Homes 4

Risk-Adjusted Performance

0 of 100

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 newest stock price disturbance, may contribute to mid-run losses for the stockholders.

Selective Insurance

Risk-Adjusted Performance

5 of 100

Modest

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

Pair Trading with American Homes and Selective Insurance

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

The idea behind American Homes 4 and Selective Insurance 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.

Check out your portfolio center.

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 Transaction History module to view history of all your transactions and understand their impact on performance.