Correlation Between LGI Homes and Hovnanian Enterprises

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

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

Diversification Opportunities for LGI Homes and Hovnanian Enterprises

0.8

Correlation Coefficient

LGI Homes  Hovnanian Enterprises

Very poor diversification

The 3 months correlation between LGI and Hovnanian is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding LGI Homes and Hovnanian Enterprises in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hovnanian Enterprises 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 Hovnanian Enterprises. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hovnanian Enterprises has no effect on the direction of LGI Homes i.e., LGI Homes and Hovnanian Enterprises go up and down completely randomly.

Pair Corralation between LGI Homes and Hovnanian Enterprises

Given the investment horizon of 90 days LGI Homes is expected to generate 0.75 times more return on investment than Hovnanian Enterprises. However, LGI Homes is 1.34 times less risky than Hovnanian Enterprises. It trades about 0.04 of its potential returns per unit of risk. Hovnanian Enterprises is currently generating about 0.01 per unit of risk. If you would invest  10,431  in LGI Homes on September 2, 2024 and sell it today you would earn a total of  518.00  from holding LGI Homes or generate 4.97% return on investment over 90 days.

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

LGI Homes  vs.  Hovnanian Enterprises

LGI Homes

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in LGI Homes are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite fairly unfluctuating forward indicators, LGI Homes may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Hovnanian Enterprises

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Hovnanian Enterprises has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable basic indicators, Hovnanian Enterprises is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with LGI Homes and Hovnanian Enterprises

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

The idea behind LGI Homes and Hovnanian Enterprises 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 Global Correlations module to find global opportunities by holding instruments from different markets.