Correlation Between Stepan and MI Homes

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

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

Diversification Opportunities for Stepan and MI Homes

0.81

Correlation Coefficient

Stepan  MI Homes

Very poor diversification

The 3 months correlation between Stepan and MHO is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Stepan Company and MI Homes in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MI Homes and Stepan 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 Stepan Company are associated (or correlated) with MI Homes. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of MI Homes has no effect on the direction of Stepan i.e., Stepan and MI Homes go up and down completely randomly.

Pair Corralation between Stepan and MI Homes

Considering the 90-day investment horizon Stepan Company is expected to under-perform the MI Homes. But the stock apears to be less risky and, when comparing its historical volatility, Stepan Company is 1.1 times less risky than MI Homes. The stock trades about -0.13 of its potential returns per unit of risk. The MI Homes is currently generating about -0.11 of returns per unit of risk over similar time horizon. If you would invest  13,634  in MI Homes on December 26, 2024 and sell it today you would lose (1,833) from holding MI Homes or give up 13.44% of portfolio value over 90 days.

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

Stepan Company  vs.  MI Homes

Stepan Company

Risk-Adjusted Performance

Very Weak

Over the last 90 days Stepan Company has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's fundamental indicators remain quite persistent which may send shares a bit higher in April 2025. The latest mess may also be a sign of long-standing up-swing for the company institutional investors.

MI Homes

Risk-Adjusted Performance

Very Weak

Over the last 90 days MI Homes has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of uncertain performance in the last few months, the Stock's technical indicators remain very healthy which may send shares a bit higher in April 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Pair Trading with Stepan and MI Homes

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

The idea behind Stepan Company and MI 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.

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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.