Correlation Between LGI Homes and International Business

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

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

Diversification Opportunities for LGI Homes and International Business

0.42

Correlation Coefficient

LGI Homes  International Business

Very weak diversification

The 3 months correlation between LGI and International is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding LGI Homes and International Business Machine in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on International Business and LGI 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 LGI Homes are associated (or correlated) with International Business. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of International Business has no effect on the direction of LGI Homes i.e., LGI Homes and International Business go up and down completely randomly.

Pair Corralation between LGI Homes and International Business

Assuming the 90 days trading horizon LGI Homes is expected to generate 8.09 times less return on investment than International Business. In addition to that, LGI Homes is 1.81 times more volatile than International Business Machines. It trades about 0.01 of its total potential returns per unit of risk. International Business Machines is currently generating about 0.1 per unit of volatility. If you would invest  14,545  in International Business Machines on September 4, 2024 and sell it today you would earn a total of  7,205  from holding International Business Machines or generate 49.54% return on investment over 90 days.

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

LGI Homes  vs.  International Business Machine

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.

International Business

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in International Business Machines are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile primary indicators, International Business unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with LGI Homes and International Business

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

The idea behind LGI Homes and International Business Machines 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.