Correlation Between NVR and LGI Homes
Can any of the company-specific risk be diversified away by investing in both NVR 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 NVR and LGI Homes into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between NVR Inc and LGI Homes, you can compare the effects of market volatilities on NVR 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 NVR with a short position of LGI Homes. Check out your portfolio center. Please also check ongoing floating volatility patterns of NVR and LGI Homes.
Diversification Opportunities for NVR and LGI Homes
Poor diversification
The 3 months correlation between NVR and LGI is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding NVR Inc and LGI Homes in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LGI Homes and NVR 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 NVR Inc 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 NVR i.e., NVR and LGI Homes go up and down completely randomly.
Pair Corralation between NVR and LGI Homes
Assuming the 90 days horizon NVR Inc is expected to generate 0.6 times more return on investment than LGI Homes. However, NVR Inc is 1.67 times less risky than LGI Homes. It trades about 0.08 of its potential returns per unit of risk. LGI Homes is currently generating about 0.04 per unit of risk. If you would invest 860,000 in NVR Inc on August 27, 2024 and sell it today you would earn a total of 25,000 from holding NVR Inc or generate 2.91% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 100.0% |
| Values | Daily Returns |
NVR Inc vs. LGI Homes
Performance |
| Timeline |
| NVR Inc |
| LGI Homes |
NVR and LGI Homes Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with NVR and LGI Homes
The main advantage of trading using opposite NVR and LGI Homes positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if NVR 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 NVR Inc 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. Titan Machinery | LGI Homes vs. WillScot Mobile Mini | LGI Homes vs. Jacquet Metal Service | LGI Homes vs. Gamma Communications plc |
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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.
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