Correlation Between Lennox International and Beacon Roofing

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

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

Diversification Opportunities for Lennox International and Beacon Roofing

0.87

Correlation Coefficient

Lennox International  Beacon Roofing

Very poor diversification

The 3 months correlation between Lennox and Beacon is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Lennox International and Beacon Roofing Supply in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Beacon Roofing Supply and Lennox International 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 Lennox International are associated (or correlated) with Beacon Roofing. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Beacon Roofing Supply has no effect on the direction of Lennox International i.e., Lennox International and Beacon Roofing go up and down completely randomly.

Pair Corralation between Lennox International and Beacon Roofing

Considering the 90-day investment horizon Lennox International is expected to generate 1.07 times more return on investment than Beacon Roofing. However, Lennox International is 1.07 times more volatile than Beacon Roofing Supply. It trades about -0.1 of its potential returns per unit of risk. Beacon Roofing Supply is currently generating about -0.18 per unit of risk. If you would invest  64,529  in Lennox International on October 11, 2024 and sell it today you would lose (1,972) from holding Lennox International or give up 3.06% of portfolio value over 90 days.

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

Lennox International  vs.  Beacon Roofing Supply

Lennox International

Risk-Adjusted Performance

3 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Lennox International are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong forward indicators, Lennox International is not utilizing all of its potentials. The latest stock price confusion, may contribute to short-horizon losses for the traders.

Beacon Roofing Supply

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Beacon Roofing Supply are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of very weak fundamental indicators, Beacon Roofing displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Lennox International and Beacon Roofing

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

The idea behind Lennox International and Beacon Roofing Supply 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.