Correlation Between Basic Materials and Lennar

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

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

Diversification Opportunities for Basic Materials and Lennar

0.14

Correlation Coefficient

Basic Materials  Lennar

Average diversification

The 3 months correlation between Basic and Lennar is 0.14. Overlapping area represents the amount of risk that can be diversified away by holding Basic Materials and Lennar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lennar and Basic Materials 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 Basic Materials are associated (or correlated) with Lennar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lennar has no effect on the direction of Basic Materials i.e., Basic Materials and Lennar go up and down completely randomly.

Pair Corralation between Basic Materials and Lennar

Assuming the 90 days trading horizon Basic Materials is expected to generate 0.48 times more return on investment than Lennar. However, Basic Materials is 2.08 times less risky than Lennar. It trades about -0.12 of its potential returns per unit of risk. Lennar is currently generating about -0.14 per unit of risk. If you would invest  584,354  in Basic Materials on October 6, 2024 and sell it today you would lose (46,165) from holding Basic Materials or give up 7.9% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	95.0%
Values	Daily Returns

Basic Materials  vs.  Lennar

Pair Trading with Basic Materials and Lennar

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

The idea behind Basic Materials and Lennar 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.