Correlation Between Lennar and LGI Homes
Can any of the company-specific risk be diversified away by investing in both Lennar 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 Lennar and LGI Homes into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Lennar and LGI Homes, you can compare the effects of market volatilities on Lennar 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 Lennar with a short position of LGI Homes. Check out your portfolio center. Please also check ongoing floating volatility patterns of Lennar and LGI Homes.
Diversification Opportunities for Lennar and LGI Homes
Very poor diversification
The 3 months correlation between Lennar and LGI is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Lennar and LGI Homes in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LGI Homes and Lennar 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 Lennar 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 Lennar i.e., Lennar and LGI Homes go up and down completely randomly.
Pair Corralation between Lennar and LGI Homes
Considering the 90-day investment horizon Lennar is expected to generate 0.69 times more return on investment than LGI Homes. However, Lennar is 1.46 times less risky than LGI Homes. It trades about 0.07 of its potential returns per unit of risk. LGI Homes is currently generating about 0.0 per unit of risk. If you would invest 11,122 in Lennar on August 31, 2024 and sell it today you would earn a total of 6,317 from holding Lennar or generate 56.8% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Lennar vs. LGI Homes
Performance |
| Timeline |
| Lennar |
| LGI Homes |
Lennar and LGI Homes Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Lennar and LGI Homes
The main advantage of trading using opposite Lennar and LGI Homes positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Lennar 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 Lennar 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. MI Homes | LGI Homes vs. Taylor Morn Home | LGI Homes vs. TRI Pointe Homes | LGI Homes vs. Beazer Homes USA |
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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.
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