Correlation Between Small Cap and DR Horton

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

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

Diversification Opportunities for Small Cap and DR Horton

-0.71

Correlation Coefficient

Small Cap  DR Horton

Pay attention - limited upside

The 3 months correlation between Small and DHI is -0.71. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Premium and DR Horton in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DR Horton and Small Cap 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 Small Cap Premium are associated (or correlated) with DR Horton. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DR Horton has no effect on the direction of Small Cap i.e., Small Cap and DR Horton go up and down completely randomly.

Pair Corralation between Small Cap and DR Horton

Considering the 90-day investment horizon Small Cap Premium is expected to generate 0.41 times more return on investment than DR Horton. However, Small Cap Premium is 2.42 times less risky than DR Horton. It trades about 0.07 of its potential returns per unit of risk. DR Horton is currently generating about -0.43 per unit of risk. If you would invest  2,437  in Small Cap Premium on October 6, 2024 and sell it today you would earn a total of  19.00  from holding Small Cap Premium or generate 0.78% return on investment over 90 days.

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

Small Cap Premium  vs.  DR Horton

Small Cap Premium

Risk-Adjusted Performance

2 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Small Cap Premium are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, Small Cap is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

DR Horton

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days DR Horton 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 technical indicators remain fairly strong which may send shares a bit higher in February 2025. The recent confusion may also be a sign of long-lasting up-swing for the firm traders.

Pair Trading with Small Cap and DR Horton

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

The idea behind Small Cap Premium and DR Horton 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.