Correlation Between Installed Building and LGI Homes

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

By analyzing existing cross correlation between Installed Building Products and LGI Homes, you can compare the effects of market volatilities on Installed Building 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 Installed Building with a short position of LGI Homes. Check out your portfolio center. Please also check ongoing floating volatility patterns of Installed Building and LGI Homes.

Diversification Opportunities for Installed Building and LGI Homes

0.76

Correlation Coefficient

Installed Building  LGI Homes

Poor diversification

The 3 months correlation between Installed and LGI is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Installed Building Products and LGI Homes in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LGI Homes and Installed Building 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 Installed Building Products 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 Installed Building i.e., Installed Building and LGI Homes go up and down completely randomly.

Pair Corralation between Installed Building and LGI Homes

Considering the 90-day investment horizon Installed Building Products is expected to generate 1.21 times more return on investment than LGI Homes. However, Installed Building is 1.21 times more volatile than LGI Homes. It trades about -0.03 of its potential returns per unit of risk. LGI Homes is currently generating about -0.07 per unit of risk. If you would invest  22,326  in Installed Building Products on September 13, 2024 and sell it today you would lose (1,736) from holding Installed Building Products or give up 7.78% of portfolio value over 90 days.

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

Installed Building Products  vs.  LGI Homes

Installed Building

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Installed Building Products has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable fundamental drivers, Installed Building is not utilizing all of its potentials. The newest stock price agitation, may contribute to short-term losses for the retail investors.

LGI Homes

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days LGI Homes has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest uncertain performance, the Stock's forward indicators remain strong and the recent confusion on Wall Street may also be a sign of long-lasting gains for the firm traders.

Pair Trading with Installed Building and LGI Homes

The main advantage of trading using opposite Installed Building and LGI Homes positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Installed Building 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 Installed Building Products 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.

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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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.