Correlation Between Toll Brothers and PulteGroup

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

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

Diversification Opportunities for Toll Brothers and PulteGroup

0.58

Correlation Coefficient

Toll Brothers  PulteGroup

Very weak diversification

The 3 months correlation between Toll and PulteGroup is 0.58. Overlapping area represents the amount of risk that can be diversified away by holding Toll Brothers and PulteGroup in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PulteGroup 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 PulteGroup. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PulteGroup has no effect on the direction of Toll Brothers i.e., Toll Brothers and PulteGroup go up and down completely randomly.

Pair Corralation between Toll Brothers and PulteGroup

Assuming the 90 days horizon Toll Brothers is expected to generate 1.06 times more return on investment than PulteGroup. However, Toll Brothers is 1.06 times more volatile than PulteGroup. It trades about 0.05 of its potential returns per unit of risk. PulteGroup is currently generating about 0.02 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	Weak
Accuracy	100.0%
Values	Daily Returns

Toll Brothers  vs.  PulteGroup

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.

PulteGroup

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days PulteGroup 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 PulteGroup

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

The idea behind Toll Brothers and PulteGroup 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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.