Correlation Between LGI Homes and Texas Roadhouse

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

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

Diversification Opportunities for LGI Homes and Texas Roadhouse

0.27

Correlation Coefficient

LGI Homes  Texas Roadhouse

Modest diversification

The 3 months correlation between LGI and Texas is 0.27. Overlapping area represents the amount of risk that can be diversified away by holding LGI Homes and Texas Roadhouse in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Texas Roadhouse and LGI Homes 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 LGI Homes are associated (or correlated) with Texas Roadhouse. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Texas Roadhouse has no effect on the direction of LGI Homes i.e., LGI Homes and Texas Roadhouse go up and down completely randomly.

Pair Corralation between LGI Homes and Texas Roadhouse

Assuming the 90 days trading horizon LGI Homes is expected to under-perform the Texas Roadhouse. In addition to that, LGI Homes is 1.79 times more volatile than Texas Roadhouse. It trades about -0.01 of its total potential returns per unit of risk. Texas Roadhouse is currently generating about 0.09 per unit of volatility. If you would invest  9,985  in Texas Roadhouse on October 22, 2024 and sell it today you would earn a total of  7,290  from holding Texas Roadhouse or generate 73.01% return on investment over 90 days.

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

LGI Homes  vs.  Texas Roadhouse

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. In spite of comparatively stable basic indicators, LGI Homes is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Texas Roadhouse

Risk-Adjusted Performance

3 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Texas Roadhouse are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Texas Roadhouse is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with LGI Homes and Texas Roadhouse

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

The idea behind LGI Homes and Texas Roadhouse 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..