Correlation Between Lennar and TRI Pointe

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

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

Diversification Opportunities for Lennar and TRI Pointe

0.75

Correlation Coefficient

Lennar  TRI Pointe

Poor diversification

The 3 months correlation between Lennar and TRI is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Lennar and TRI Pointe Homes in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on TRI Pointe Homes 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 TRI Pointe. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of TRI Pointe Homes has no effect on the direction of Lennar i.e., Lennar and TRI Pointe go up and down completely randomly.

Pair Corralation between Lennar and TRI Pointe

Considering the 90-day investment horizon Lennar is expected to generate 2.6 times less return on investment than TRI Pointe. In addition to that, Lennar is 1.31 times more volatile than TRI Pointe Homes. It trades about 0.06 of its total potential returns per unit of risk. TRI Pointe Homes is currently generating about 0.2 per unit of volatility. If you would invest  4,081  in TRI Pointe Homes on August 30, 2024 and sell it today you would earn a total of  283.00  from holding TRI Pointe Homes or generate 6.93% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.65%
Values	Daily Returns

Lennar  vs.  TRI Pointe Homes

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.

TRI Pointe Homes

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days TRI Pointe Homes has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong basic indicators, TRI Pointe is not utilizing all of its potentials. The recent stock price confusion, may contribute to short-horizon losses for the traders.

Pair Trading with Lennar and TRI Pointe

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

The idea behind Lennar and TRI Pointe 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.