Correlation Between LGI Homes and Meritage

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

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

Diversification Opportunities for LGI Homes and Meritage

0.94

Correlation Coefficient

LGI Homes  Meritage

Almost no diversification

The 3 months correlation between LGI and Meritage is 0.94. Overlapping area represents the amount of risk that can be diversified away by holding LGI Homes and Meritage in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Meritage 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 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 LGI Homes i.e., LGI Homes and Meritage go up and down completely randomly.

Pair Corralation between LGI Homes and Meritage

Given the investment horizon of 90 days LGI Homes is expected to generate 1.07 times more return on investment than Meritage. However, LGI Homes is 1.07 times more volatile than Meritage. It trades about 0.0 of its potential returns per unit of risk. Meritage is currently generating about -0.03 per unit of risk. If you would invest  10,724  in LGI Homes on September 12, 2024 and sell it today you would lose (174.00) from holding LGI Homes or give up 1.62% 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.  Meritage

LGI Homes

Risk-Adjusted Performance

0 of 100

Weak

Over the last 90 days LGI Homes has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong forward indicators, LGI Homes is not utilizing all of its potentials. The recent stock price confusion, may contribute to short-horizon losses for the traders.

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 fairly strong basic indicators, Meritage is not utilizing all of its potentials. The recent stock price confusion, may contribute to short-horizon losses for the traders.

Pair Trading with LGI Homes and Meritage

The main advantage of trading using opposite LGI Homes and Meritage positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if LGI Homes 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 LGI Homes 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 CEOs Directory module to screen CEOs from public companies around the world.