Correlation Between Meritage and LGI Homes

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

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

Diversification Opportunities for Meritage and LGI Homes

0.82

Correlation Coefficient

Meritage  LGI Homes

Very poor diversification

The 3 months correlation between Meritage and LGI is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Meritage and LGI Homes in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LGI Homes 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 LGI Homes. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LGI Homes has no effect on the direction of Meritage i.e., Meritage and LGI Homes go up and down completely randomly.

Pair Corralation between Meritage and LGI Homes

Considering the 90-day investment horizon Meritage is expected to generate 0.87 times more return on investment than LGI Homes. However, Meritage is 1.15 times less risky than LGI Homes. It trades about -0.03 of its potential returns per unit of risk. LGI Homes is currently generating about -0.17 per unit of risk. If you would invest  7,658  in Meritage on December 27, 2024 and sell it today you would lose (409.00) from holding Meritage or give up 5.34% of portfolio value over 90 days.

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

Meritage  vs.  LGI Homes

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.

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.

Pair Trading with Meritage and LGI Homes

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

The idea behind Meritage and LGI Homes 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.