Correlation Between KB Home and Smith Douglas

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

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

Diversification Opportunities for KB Home and Smith Douglas

0.85

Correlation Coefficient

KB Home  Smith Douglas

Very poor diversification

The 3 months correlation between KBH and Smith is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding KB Home and Smith Douglas Homes in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Smith Douglas Homes and KB Home 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 KB Home are associated (or correlated) with Smith Douglas. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Smith Douglas Homes has no effect on the direction of KB Home i.e., KB Home and Smith Douglas go up and down completely randomly.

Pair Corralation between KB Home and Smith Douglas

Considering the 90-day investment horizon KB Home is expected to generate 1.23 times less return on investment than Smith Douglas. But when comparing it to its historical volatility, KB Home is 1.37 times less risky than Smith Douglas. It trades about 0.02 of its potential returns per unit of risk. Smith Douglas Homes is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  2,400  in Smith Douglas Homes on October 6, 2024 and sell it today you would earn a total of  49.00  from holding Smith Douglas Homes or generate 2.04% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	99.6%
Values	Daily Returns

KB Home  vs.  Smith Douglas Homes

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. Despite inconsistent performance in the last few months, the Stock's fundamental drivers 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.

Smith Douglas Homes

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Smith Douglas Homes has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of conflicting performance in the last few months, the Stock's technical indicators remain rather sound which may send shares a bit higher in February 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with KB Home and Smith Douglas

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

The idea behind KB Home and Smith Douglas 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..