Can any of the company-specific risk be diversified away by investing in both Equinix and Equity Residential 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 Equinix and Equity Residential into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Equinix and Equity Residential, you can compare the effects of market volatilities on Equinix and Equity Residential 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 Equinix with a short position of Equity Residential. Check out your portfolio center. Please also check ongoing floating volatility patterns of Equinix and Equity Residential.
Diversification Opportunities for Equinix and Equity Residential
The 3 months correlation between Equinix and Equity is -0.37. Overlapping area represents the amount of risk that can be diversified away by holding Equinix and Equity Residential in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Equity Residential and Equinix 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 Equinix are associated (or correlated) with Equity Residential. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Equity Residential has no effect on the direction of Equinix i.e., Equinix and Equity Residential go up and down completely randomly.
Pair Corralation between Equinix and Equity Residential
Given the investment horizon of 90 days Equinix is expected to generate 3.03 times more return on investment than Equity Residential. However, Equinix is 3.03 times more volatile than Equity Residential. It trades about 0.18 of its potential returns per unit of risk. Equity Residential is currently generating about -0.08 per unit of risk. If you would invest 69,001 in Equinix on March 6, 2024 and sell it today you would earn a total of 7,467 from holding Equinix or generate 10.82% return on investment over 90 days.
Over the last 90 days Equinix has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of inconsistent performance in the last few months, the Stock's forward indicators remain fairly strong which may send shares a bit higher in July 2024. The current disturbance may also be a sign of long term up-swing for the company investors.
Compared to the overall equity markets, risk-adjusted returns on investments in Equity Residential are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Even with relatively invariable basic indicators, Equity Residential is not utilizing all of its potentials. The newest stock price agitation, may contribute to short-term losses for the retail investors.