Correlation Between Floor Decor and LGI Homes
Can any of the company-specific risk be diversified away by investing in both Floor Decor and LGI Homes 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 Floor Decor and LGI Homes into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Floor Decor Holdings and LGI Homes, you can compare the effects of market volatilities on Floor Decor and LGI Homes 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 Floor Decor with a short position of LGI Homes. Check out your portfolio center. Please also check ongoing floating volatility patterns of Floor Decor and LGI Homes.
Diversification Opportunities for Floor Decor and LGI Homes
0.85 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Floor and LGI is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Floor Decor Holdings and LGI Homes in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LGI Homes and Floor Decor 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 Floor Decor Holdings are associated (or correlated) with LGI Homes. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LGI Homes has no effect on the direction of Floor Decor i.e., Floor Decor and LGI Homes go up and down completely randomly.
Pair Corralation between Floor Decor and LGI Homes
Considering the 90-day investment horizon Floor Decor Holdings is expected to generate 0.9 times more return on investment than LGI Homes. However, Floor Decor Holdings is 1.11 times less risky than LGI Homes. It trades about 0.05 of its potential returns per unit of risk. LGI Homes is currently generating about 0.02 per unit of risk. If you would invest 7,204 in Floor Decor Holdings on August 27, 2024 and sell it today you would earn a total of 3,996 from holding Floor Decor Holdings or generate 55.47% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Floor Decor Holdings vs. LGI Homes
Performance |
| Timeline |
| Floor Decor Holdings |
| LGI Homes |
Floor Decor and LGI Homes Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Floor Decor and LGI Homes
The main advantage of trading using opposite Floor Decor and LGI Homes positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Floor Decor position performs unexpectedly, LGI Homes 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 LGI Homes will offset losses from the drop in LGI Homes' long position.The idea behind Floor Decor Holdings and LGI Homes 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.| LGI Homes vs. Arhaus Inc | LGI Homes vs. Floor Decor Holdings | LGI Homes vs. Kingfisher plc | LGI Homes vs. Haverty Furniture Companies |
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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.
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