Correlation Between AvalonBay Communities and Essex Property

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

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

Diversification Opportunities for AvalonBay Communities and Essex Property

0.94

Correlation Coefficient

AvalonBay Communities  Essex Property

Almost no diversification

The 3 months correlation between AvalonBay and Essex is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding AvalonBay Communities and Essex Property Trust in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Essex Property Trust and AvalonBay Communities 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 AvalonBay Communities are associated (or correlated) with Essex Property. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Essex Property Trust has no effect on the direction of AvalonBay Communities i.e., AvalonBay Communities and Essex Property go up and down completely randomly.

Pair Corralation between AvalonBay Communities and Essex Property

Considering the 90-day investment horizon AvalonBay Communities is expected to generate 0.88 times more return on investment than Essex Property. However, AvalonBay Communities is 1.14 times less risky than Essex Property. It trades about 0.1 of its potential returns per unit of risk. Essex Property Trust is currently generating about 0.06 per unit of risk. If you would invest  17,647  in AvalonBay Communities on February 1, 2024 and sell it today you would earn a total of  1,310  from holding AvalonBay Communities or generate 7.42% return on investment over 90 days.

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

AvalonBay Communities  vs.  Essex Property Trust

AvalonBay Communities

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in AvalonBay Communities are ranked lower than 7 (%) 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 June 2024.

Essex Property Trust

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Essex Property Trust are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, Essex Property is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with AvalonBay Communities and Essex Property

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

The idea behind AvalonBay Communities and Essex Property Trust 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.