Correlation Between Toll Brothers and MI Homes

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

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

Diversification Opportunities for Toll Brothers and MI Homes

0.88

Correlation Coefficient

Toll Brothers  MI Homes

Very poor diversification

The 3 months correlation between Toll and MHO is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Toll Brothers and MI Homes in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on MI Homes 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 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 Toll Brothers i.e., Toll Brothers and MI Homes go up and down completely randomly.

Pair Corralation between Toll Brothers and MI Homes

Considering the 90-day investment horizon Toll Brothers is expected to under-perform the MI Homes. In addition to that, Toll Brothers is 1.12 times more volatile than MI Homes. It trades about -0.37 of its total potential returns per unit of risk. MI Homes is currently generating about -0.28 per unit of volatility. If you would invest  13,807  in MI Homes on November 28, 2024 and sell it today you would lose (1,862) from holding MI Homes or give up 13.49% of portfolio value over 90 days.

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

Toll Brothers  vs.  MI Homes

Toll Brothers

Risk-Adjusted Performance

Very Weak

Over the last 90 days Toll Brothers has generated negative risk-adjusted returns adding no value to investors with long positions. Despite inconsistent performance in the last few months, the Stock's basic indicators remain quite persistent which may send shares a bit higher in March 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 inconsistent performance in the last few months, the Stock's technical indicators remain very healthy which may send shares a bit higher in March 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Pair Trading with Toll Brothers and MI Homes

The main advantage of trading using opposite Toll Brothers and MI Homes positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Toll Brothers 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 Toll Brothers 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.

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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 Transaction History module to view history of all your transactions and understand their impact on performance.