Correlation Between Ecolab and KB Home

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

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

Diversification Opportunities for Ecolab and KB Home

-0.83

Correlation Coefficient

Ecolab  KB Home

Pay attention - limited upside

The 3 months correlation between Ecolab and KBH is -0.83. Overlapping area represents the amount of risk that can be diversified away by holding Ecolab Inc and KB Home in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on KB Home and Ecolab 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 Ecolab Inc 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 Ecolab i.e., Ecolab and KB Home go up and down completely randomly.

Pair Corralation between Ecolab and KB Home

Assuming the 90 days trading horizon Ecolab is expected to generate 1.01 times less return on investment than KB Home. But when comparing it to its historical volatility, Ecolab Inc is 2.97 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 0.06 of returns per unit of risk over similar time horizon. If you would invest  104,390  in KB Home on October 12, 2024 and sell it today you would earn a total of  29,310  from holding KB Home or generate 28.08% return on investment over 90 days.

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

Ecolab Inc  vs.  KB Home

Ecolab Inc

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Ecolab Inc are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong essential indicators, Ecolab is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the 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 weak 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 Ecolab and KB Home

The main advantage of trading using opposite Ecolab and KB Home positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Ecolab 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 Ecolab Inc 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.