Correlation Between LGI Homes and Beazer Homes

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

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

Diversification Opportunities for LGI Homes and Beazer Homes

0.94

Correlation Coefficient

LGI Homes  Beazer Homes

Almost no diversification

The 3 months correlation between LGI and Beazer is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding LGI Homes and Beazer Homes USA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Beazer Homes USA 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 Beazer Homes. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Beazer Homes USA has no effect on the direction of LGI Homes i.e., LGI Homes and Beazer Homes go up and down completely randomly.

Pair Corralation between LGI Homes and Beazer Homes

Given the investment horizon of 90 days LGI Homes is expected to under-perform the Beazer Homes. But the stock apears to be less risky and, when comparing its historical volatility, LGI Homes is 1.64 times less risky than Beazer Homes. The stock trades about -0.16 of its potential returns per unit of risk. The Beazer Homes USA is currently generating about -0.09 of returns per unit of risk over similar time horizon. If you would invest  2,674  in Beazer Homes USA on December 2, 2024 and sell it today you would lose (444.00) from holding Beazer Homes USA or give up 16.6% of portfolio value over 90 days.

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

LGI Homes  vs.  Beazer Homes USA

LGI Homes

Risk-Adjusted Performance

Very Weak

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

Beazer Homes USA

Risk-Adjusted Performance

Very Weak

Over the last 90 days Beazer Homes USA 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 April 2025. The recent confusion may also be a sign of long-lasting up-swing for the firm traders.

Pair Trading with LGI Homes and Beazer Homes

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

The idea behind LGI Homes and Beazer Homes USA 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.