Correlation Between Aedas Homes and LGI Homes

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

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

Diversification Opportunities for Aedas Homes and LGI Homes

-0.06

Correlation Coefficient

Aedas Homes  LGI Homes

Good diversification

The 3 months correlation between Aedas and LGI is -0.06. Overlapping area represents the amount of risk that can be diversified away by holding Aedas Homes SA and LGI Homes in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LGI Homes and Aedas Homes 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 Aedas Homes SA 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 Aedas Homes i.e., Aedas Homes and LGI Homes go up and down completely randomly.

Pair Corralation between Aedas Homes and LGI Homes

Assuming the 90 days horizon Aedas Homes is expected to generate 10.05 times less return on investment than LGI Homes. But when comparing it to its historical volatility, Aedas Homes SA is 1.35 times less risky than LGI Homes. It trades about 0.01 of its potential returns per unit of risk. LGI Homes is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  9,350  in LGI Homes on September 4, 2024 and sell it today you would earn a total of  950.00  from holding LGI Homes or generate 10.16% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.46%
Values	Daily Returns

Aedas Homes SA  vs.  LGI Homes

Aedas Homes SA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Aedas Homes SA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, Aedas Homes is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

LGI Homes

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in LGI Homes are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, LGI Homes may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Aedas Homes and LGI Homes

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

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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.