Correlation Between Applied Materials and KB Home

Can any of the company-specific risk be diversified away by investing in both Applied Materials 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 Applied Materials and KB Home into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Applied Materials and KB Home, you can compare the effects of market volatilities on Applied Materials 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 Applied Materials with a short position of KB Home. Check out your portfolio center. Please also check ongoing floating volatility patterns of Applied Materials and KB Home.

Diversification Opportunities for Applied Materials and KB Home

0.68

Correlation Coefficient

Applied Materials  KB Home

Poor diversification

The 3 months correlation between Applied and KBH is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Applied Materials and KB Home in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on KB Home and Applied Materials 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 Applied Materials 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 Applied Materials i.e., Applied Materials and KB Home go up and down completely randomly.

Pair Corralation between Applied Materials and KB Home

Assuming the 90 days trading horizon Applied Materials is expected to generate 1.31 times less return on investment than KB Home. In addition to that, Applied Materials is 1.1 times more volatile than KB Home. It trades about 0.05 of its total potential returns per unit of risk. KB Home is currently generating about 0.07 per unit of volatility. If you would invest  92,624  in KB Home on October 5, 2024 and sell it today you would earn a total of  41,076  from holding KB Home or generate 44.35% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

Applied Materials  vs.  KB Home

Applied Materials

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Applied Materials has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest weak performance, the Stock's basic indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

KB Home

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days KB Home has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unfluctuating performance in the last few months, the Stock's technical indicators remain fairly strong which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with Applied Materials and KB Home

The main advantage of trading using opposite Applied Materials and KB Home positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Applied Materials 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 Applied Materials 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.

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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 Transaction History module to view history of all your transactions and understand their impact on performance.