Correlation Between Meritage and Century Communities

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

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

Diversification Opportunities for Meritage and Century Communities

0.8

Correlation Coefficient

Meritage  Century Communities

Very poor diversification

The 3 months correlation between Meritage and Century is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Meritage and Century Communities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Century Communities and Meritage 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 Meritage are associated (or correlated) with Century Communities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Century Communities has no effect on the direction of Meritage i.e., Meritage and Century Communities go up and down completely randomly.

Pair Corralation between Meritage and Century Communities

Considering the 90-day investment horizon Meritage is expected to generate 0.93 times more return on investment than Century Communities. However, Meritage is 1.07 times less risky than Century Communities. It trades about -0.03 of its potential returns per unit of risk. Century Communities is currently generating about -0.05 per unit of risk. If you would invest  7,625  in Meritage on December 29, 2024 and sell it today you would lose (360.00) from holding Meritage or give up 4.72% of portfolio value over 90 days.

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

Meritage  vs.  Century Communities

Meritage

Risk-Adjusted Performance

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 newest stock price confusion, may contribute to short-horizon losses for the traders.

Century Communities

Risk-Adjusted Performance

Very Weak

Over the last 90 days Century Communities has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's fundamental indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Pair Trading with Meritage and Century Communities

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

The idea behind Meritage and Century Communities 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.

Check out your portfolio center.

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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.