Correlation Between Armstrong World and Builders FirstSource

Can any of the company-specific risk be diversified away by investing in both Armstrong World and Builders FirstSource 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 Armstrong World and Builders FirstSource into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Armstrong World Industries and Builders FirstSource, you can compare the effects of market volatilities on Armstrong World and Builders FirstSource 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 Armstrong World with a short position of Builders FirstSource. Check out your portfolio center. Please also check ongoing floating volatility patterns of Armstrong World and Builders FirstSource.

Diversification Opportunities for Armstrong World and Builders FirstSource

-0.61

Correlation Coefficient

Armstrong World  Builders FirstSource

Excellent diversification

The 3 months correlation between Armstrong and Builders is -0.61. Overlapping area represents the amount of risk that can be diversified away by holding Armstrong World Industries and Builders FirstSource in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Builders FirstSource and Armstrong World 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 Armstrong World Industries are associated (or correlated) with Builders FirstSource. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Builders FirstSource has no effect on the direction of Armstrong World i.e., Armstrong World and Builders FirstSource go up and down completely randomly.

Pair Corralation between Armstrong World and Builders FirstSource

Considering the 90-day investment horizon Armstrong World is expected to generate 1.14 times less return on investment than Builders FirstSource. But when comparing it to its historical volatility, Armstrong World Industries is 1.71 times less risky than Builders FirstSource. It trades about 0.11 of its potential returns per unit of risk. Builders FirstSource is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  6,488  in Builders FirstSource on September 20, 2024 and sell it today you would earn a total of  8,159  from holding Builders FirstSource or generate 125.76% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	99.8%
Values	Daily Returns

Armstrong World Industries  vs.  Builders FirstSource

Armstrong World Indu

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Armstrong World Industries are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite fairly weak basic indicators, Armstrong World demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Builders FirstSource

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Builders FirstSource has generated negative risk-adjusted returns adding no value to investors with long positions. Even with fragile performance in the last few months, the Stock's fundamental indicators remain relatively invariable which may send shares a bit higher in January 2025. The latest agitation may also be a sign of long-running up-swing for the enterprise retail investors.

Pair Trading with Armstrong World and Builders FirstSource

The main advantage of trading using opposite Armstrong World and Builders FirstSource positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Armstrong World position performs unexpectedly, Builders FirstSource 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 Builders FirstSource will offset losses from the drop in Builders FirstSource's long position.

The idea behind Armstrong World Industries and Builders FirstSource 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 Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.