Correlation Between Johnson Controls and Builders FirstSource

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

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

Diversification Opportunities for Johnson Controls and Builders FirstSource

0.15

Correlation Coefficient

Johnson Controls  Builders FirstSource

Average diversification

The 3 months correlation between Johnson and Builders is 0.15. Overlapping area represents the amount of risk that can be diversified away by holding Johnson Controls International and Builders FirstSource in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Builders FirstSource and Johnson Controls 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 Johnson Controls International are associated (or correlated) with Builders FirstSource. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Builders FirstSource has no effect on the direction of Johnson Controls i.e., Johnson Controls and Builders FirstSource go up and down completely randomly.

Pair Corralation between Johnson Controls and Builders FirstSource

Considering the 90-day investment horizon Johnson Controls International is expected to generate 0.71 times more return on investment than Builders FirstSource. However, Johnson Controls International is 1.41 times less risky than Builders FirstSource. It trades about 0.19 of its potential returns per unit of risk. Builders FirstSource is currently generating about 0.08 per unit of risk. If you would invest  7,041  in Johnson Controls International on September 1, 2024 and sell it today you would earn a total of  1,345  from holding Johnson Controls International or generate 19.1% return on investment over 90 days.

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

Johnson Controls International  vs.  Builders FirstSource

Johnson Controls Int

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Johnson Controls International are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Despite fairly weak fundamental indicators, Johnson Controls demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Builders FirstSource

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Builders FirstSource are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Even with relatively fragile fundamental indicators, Builders FirstSource may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Pair Trading with Johnson Controls and Builders FirstSource

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

The idea behind Johnson Controls International and Builders FirstSource 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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.