Correlation Between TEXAS ROADHOUSE and LGI Homes

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

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

Diversification Opportunities for TEXAS ROADHOUSE and LGI Homes

-0.22

Correlation Coefficient

TEXAS ROADHOUSE  LGI Homes

Very good diversification

The 3 months correlation between TEXAS and LGI is -0.22. Overlapping area represents the amount of risk that can be diversified away by holding TEXAS ROADHOUSE and LGI Homes in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LGI Homes and TEXAS ROADHOUSE 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 TEXAS ROADHOUSE are associated (or correlated) with LGI Homes. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of LGI Homes has no effect on the direction of TEXAS ROADHOUSE i.e., TEXAS ROADHOUSE and LGI Homes go up and down completely randomly.

Pair Corralation between TEXAS ROADHOUSE and LGI Homes

Assuming the 90 days trading horizon TEXAS ROADHOUSE is expected to generate 0.71 times more return on investment than LGI Homes. However, TEXAS ROADHOUSE is 1.41 times less risky than LGI Homes. It trades about 0.19 of its potential returns per unit of risk. LGI Homes is currently generating about 0.04 per unit of risk. If you would invest  14,731  in TEXAS ROADHOUSE on September 12, 2024 and sell it today you would earn a total of  3,569  from holding TEXAS ROADHOUSE or generate 24.23% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.46%
Values	Daily Returns

TEXAS ROADHOUSE  vs.  LGI Homes

TEXAS ROADHOUSE

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in TEXAS ROADHOUSE are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain basic indicators, TEXAS ROADHOUSE exhibited solid returns over the last few months and may actually be approaching a breakup point.

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. In spite of comparatively fragile basic indicators, LGI Homes may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with TEXAS ROADHOUSE and LGI Homes

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

The idea behind TEXAS ROADHOUSE and LGI 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.