Correlation Between Toll Brothers and Lennar

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

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

Diversification Opportunities for Toll Brothers and Lennar

0.62

Correlation Coefficient

Toll Brothers  Lennar

Poor diversification

The 3 months correlation between Toll and Lennar is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding Toll Brothers and Lennar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lennar and Toll Brothers 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 Toll Brothers are associated (or correlated) with Lennar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lennar has no effect on the direction of Toll Brothers i.e., Toll Brothers and Lennar go up and down completely randomly.

Pair Corralation between Toll Brothers and Lennar

Assuming the 90 days horizon Toll Brothers is expected to generate 1.34 times more return on investment than Lennar. However, Toll Brothers is 1.34 times more volatile than Lennar. It trades about 0.05 of its potential returns per unit of risk. Lennar is currently generating about -0.01 per unit of risk. If you would invest  10,713  in Toll Brothers on September 24, 2024 and sell it today you would earn a total of  1,332  from holding Toll Brothers or generate 12.43% return on investment over 90 days.

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

Toll Brothers  vs.  Lennar

Toll Brothers

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Toll Brothers has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Lennar

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Lennar has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fragile performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in January 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

Pair Trading with Toll Brothers and Lennar

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

The idea behind Toll Brothers and Lennar 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.