Correlation Between Taylor Morrison and LGI Homes

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

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

Diversification Opportunities for Taylor Morrison and LGI Homes

0.79

Correlation Coefficient

Taylor Morrison  LGI Homes

Poor diversification

The 3 months correlation between Taylor and LGI is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Taylor Morrison Home and LGI Homes in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LGI Homes and Taylor Morrison 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 Taylor Morrison Home 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 Taylor Morrison i.e., Taylor Morrison and LGI Homes go up and down completely randomly.

Pair Corralation between Taylor Morrison and LGI Homes

Assuming the 90 days trading horizon Taylor Morrison Home is expected to generate 0.85 times more return on investment than LGI Homes. However, Taylor Morrison Home is 1.18 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  5,750  in Taylor Morrison Home on December 23, 2024 and sell it today you would lose (250.00) from holding Taylor Morrison Home or give up 4.35% of portfolio value over 90 days.

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

Taylor Morrison Home  vs.  LGI Homes

Taylor Morrison Home

Risk-Adjusted Performance

Very Weak

Over the last 90 days Taylor Morrison Home has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Taylor Morrison is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

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. In spite of uncertain performance in the last few months, the Stock's basic indicators remain comparatively stable which may send shares a bit higher in April 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

Pair Trading with Taylor Morrison and LGI Homes

The main advantage of trading using opposite Taylor Morrison and LGI Homes positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Taylor Morrison 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 Taylor Morrison Home 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.