Correlation Between Target and AvalonBay Communities

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

By analyzing existing cross correlation between Target and AvalonBay Communities, you can compare the effects of market volatilities on Target and AvalonBay Communities 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 Target with a short position of AvalonBay Communities. Check out your portfolio center. Please also check ongoing floating volatility patterns of Target and AvalonBay Communities.

Diversification Opportunities for Target and AvalonBay Communities

-0.4

Correlation Coefficient

Target  AvalonBay Communities

Very good diversification

The 3 months correlation between Target and AvalonBay is -0.4. Overlapping area represents the amount of risk that can be diversified away by holding Target and AvalonBay Communities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AvalonBay Communities and Target 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 Target are associated (or correlated) with AvalonBay Communities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AvalonBay Communities has no effect on the direction of Target i.e., Target and AvalonBay Communities go up and down completely randomly.

Pair Corralation between Target and AvalonBay Communities

Assuming the 90 days trading horizon Target is expected to under-perform the AvalonBay Communities. In addition to that, Target is 2.03 times more volatile than AvalonBay Communities. It trades about -0.01 of its total potential returns per unit of risk. AvalonBay Communities is currently generating about 0.08 per unit of volatility. If you would invest  32,000  in AvalonBay Communities on September 23, 2024 and sell it today you would earn a total of  1,924  from holding AvalonBay Communities or generate 6.01% return on investment over 90 days.

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

Target  vs.  AvalonBay Communities

Target

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Target has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Target is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

AvalonBay Communities

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in AvalonBay Communities are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, AvalonBay Communities may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Target and AvalonBay Communities

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

The idea behind Target and AvalonBay Communities 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.