Correlation Between Lennar and Toll Brothers

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

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

Diversification Opportunities for Lennar and Toll Brothers

0.02

Correlation Coefficient

Lennar  Toll Brothers

Significant diversification

The 3 months correlation between Lennar and Toll is 0.02. Overlapping area represents the amount of risk that can be diversified away by holding Lennar and Toll Brothers in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Toll Brothers and Lennar 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 Lennar are associated (or correlated) with Toll Brothers. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Toll Brothers has no effect on the direction of Lennar i.e., Lennar and Toll Brothers go up and down completely randomly.

Pair Corralation between Lennar and Toll Brothers

Considering the 90-day investment horizon Lennar is expected to generate 2.03 times less return on investment than Toll Brothers. But when comparing it to its historical volatility, Lennar is 1.14 times less risky than Toll Brothers. It trades about 0.07 of its potential returns per unit of risk. Toll Brothers is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  6,396  in Toll Brothers on August 31, 2024 and sell it today you would earn a total of  10,079  from holding Toll Brothers or generate 157.58% return on investment over 90 days.

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

Lennar  vs.  Toll Brothers

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. In spite of very healthy technical and fundamental indicators, Lennar is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Toll Brothers

Risk-Adjusted Performance

11 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Toll Brothers are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite quite inconsistent basic indicators, Toll Brothers disclosed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Lennar and Toll Brothers

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

The idea behind Lennar and Toll Brothers 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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.