Correlation Between Bank of America and KB Home

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

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

Diversification Opportunities for Bank of America and KB Home

-0.37

Correlation Coefficient

Bank of America  KB Home

Very good diversification

The 3 months correlation between Bank and KBH is -0.37. Overlapping area represents the amount of risk that can be diversified away by holding Bank of America and KB Home in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on KB Home and Bank of America 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 Bank of America 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 Bank of America i.e., Bank of America and KB Home go up and down completely randomly.

Pair Corralation between Bank of America and KB Home

Assuming the 90 days trading horizon Bank of America is expected to generate 0.88 times more return on investment than KB Home. However, Bank of America is 1.13 times less risky than KB Home. It trades about 0.18 of its potential returns per unit of risk. KB Home is currently generating about -0.17 per unit of risk. If you would invest  76,375  in Bank of America on October 7, 2024 and sell it today you would earn a total of  16,125  from holding Bank of America or generate 21.11% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.39%
Values	Daily Returns

Bank of America  vs.  KB Home

Bank of America

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Bank of America are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of fairly unfluctuating fundamental indicators, Bank of America showed solid returns over the last few months and may actually be approaching a breakup point.

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 unsteady 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 Bank of America and KB Home

The main advantage of trading using opposite Bank of America and KB Home positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Bank of America 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 Bank of America 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.