Correlation Between Installed Building and Meritage

Can any of the company-specific risk be diversified away by investing in both Installed Building and Meritage 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 Meritage 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 Meritage, you can compare the effects of market volatilities on Installed Building and Meritage 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 Meritage. Check out your portfolio center. Please also check ongoing floating volatility patterns of Installed Building and Meritage.

Diversification Opportunities for Installed Building and Meritage

0.96

Correlation Coefficient

Installed Building  Meritage

Almost no diversification

The 3 months correlation between Installed and Meritage is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Installed Building Products and Meritage in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Meritage 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 Meritage. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Meritage has no effect on the direction of Installed Building i.e., Installed Building and Meritage go up and down completely randomly.

Pair Corralation between Installed Building and Meritage

Considering the 90-day investment horizon Installed Building Products is expected to under-perform the Meritage. In addition to that, Installed Building is 1.28 times more volatile than Meritage. It trades about -0.11 of its total potential returns per unit of risk. Meritage is currently generating about -0.12 per unit of volatility. If you would invest  9,639  in Meritage on October 21, 2024 and sell it today you would lose (1,581) from holding Meritage or give up 16.4% of portfolio value over 90 days.

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

Installed Building Products  vs.  Meritage

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 uncertain performance in the last few months, the Stock's fundamental drivers remain relatively invariable which may send shares a bit higher in February 2025. The latest agitation may also be a sign of long-running up-swing for the enterprise retail investors.

Meritage

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Meritage has generated negative risk-adjusted returns adding no value to investors with long positions. Despite inconsistent performance in the last few months, the Stock's basic indicators remain fairly strong which may send shares a bit higher in February 2025. The recent confusion may also be a sign of long-lasting up-swing for the firm traders.

Pair Trading with Installed Building and Meritage

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

The idea behind Installed Building Products and Meritage 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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.