Correlation Between Toll Brothers and KB Home

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

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

Diversification Opportunities for Toll Brothers and KB Home

0.31

Correlation Coefficient

Toll Brothers  KB Home

Weak diversification

The 3 months correlation between Toll and KBH is 0.31. Overlapping area represents the amount of risk that can be diversified away by holding Toll Brothers and KB Home in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on KB Home and Toll Brothers 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 Toll Brothers are associated (or correlated) with KB Home. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of KB Home has no effect on the direction of Toll Brothers i.e., Toll Brothers and KB Home go up and down completely randomly.

Pair Corralation between Toll Brothers and KB Home

Considering the 90-day investment horizon Toll Brothers is expected to generate 0.87 times more return on investment than KB Home. However, Toll Brothers is 1.15 times less risky than KB Home. It trades about 0.15 of its potential returns per unit of risk. KB Home is currently generating about 0.03 per unit of risk. If you would invest  13,966  in Toll Brothers on August 31, 2024 and sell it today you would earn a total of  2,509  from holding Toll Brothers or generate 17.97% return on investment over 90 days.

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

Toll Brothers  vs.  KB Home

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.

KB Home

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in KB Home are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong fundamental drivers, KB Home is not utilizing all of its potentials. The newest stock price confusion, may contribute to short-horizon losses for the traders.

Pair Trading with Toll Brothers and KB Home

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

The idea behind Toll Brothers and KB Home 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.