Correlation Between Welltower and AvalonBay Communities

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

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

Diversification Opportunities for Welltower and AvalonBay Communities

0.61

Correlation Coefficient

Welltower  AvalonBay Communities

Poor diversification

The 3 months correlation between Welltower and AvalonBay is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Welltower and AvalonBay Communities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AvalonBay Communities and Welltower 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 Welltower 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 Welltower i.e., Welltower and AvalonBay Communities go up and down completely randomly.

Pair Corralation between Welltower and AvalonBay Communities

Given the investment horizon of 90 days Welltower is expected to under-perform the AvalonBay Communities. But the stock apears to be less risky and, when comparing its historical volatility, Welltower is 1.1 times less risky than AvalonBay Communities. The stock trades about -0.02 of its potential returns per unit of risk. The AvalonBay Communities is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  21,850  in AvalonBay Communities on September 4, 2024 and sell it today you would earn a total of  992.00  from holding AvalonBay Communities or generate 4.54% return on investment over 90 days.

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

Welltower  vs.  AvalonBay Communities

Welltower

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Welltower are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite quite weak essential indicators, Welltower may actually be approaching a critical reversion point that can send shares even higher in January 2025.

AvalonBay Communities

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in AvalonBay Communities are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, AvalonBay Communities is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Welltower and AvalonBay Communities

The main advantage of trading using opposite Welltower and AvalonBay Communities positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Welltower 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 Welltower 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.