Correlation Between LGI Homes and KB HOME
Can any of the company-specific risk be diversified away by investing in both LGI Homes and KB HOME 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 LGI Homes and KB HOME into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between LGI Homes and KB HOME, you can compare the effects of market volatilities on LGI Homes and KB HOME 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 LGI Homes with a short position of KB HOME. Check out your portfolio center. Please also check ongoing floating volatility patterns of LGI Homes and KB HOME.
Diversification Opportunities for LGI Homes and KB HOME
Poor diversification
The 3 months correlation between LGI and KBH is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding LGI Homes and KB HOME in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on KB HOME and LGI Homes 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 LGI Homes are associated (or correlated) with KB HOME. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of KB HOME has no effect on the direction of LGI Homes i.e., LGI Homes and KB HOME go up and down completely randomly.
Pair Corralation between LGI Homes and KB HOME
Assuming the 90 days trading horizon LGI Homes is expected to generate 3.2 times less return on investment than KB HOME. In addition to that, LGI Homes is 1.28 times more volatile than KB HOME. It trades about 0.02 of its total potential returns per unit of risk. KB HOME is currently generating about 0.1 per unit of volatility. If you would invest 2,886 in KB HOME on August 29, 2024 and sell it today you would earn a total of 4,964 from holding KB HOME or generate 172.0% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
LGI Homes vs. KB HOME
Performance |
| Timeline |
| LGI Homes |
| KB HOME |
LGI Homes and KB HOME Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with LGI Homes and KB HOME
The main advantage of trading using opposite LGI Homes and KB HOME positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if LGI Homes position performs unexpectedly, KB HOME 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 KB HOME will offset losses from the drop in KB HOME's long position.The idea behind LGI Homes and KB HOME 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.
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