Correlation Between Builders FirstSource and Lennox International

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

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

Diversification Opportunities for Builders FirstSource and Lennox International

0.64

Correlation Coefficient

Builders FirstSource  Lennox International

Poor diversification

The 3 months correlation between Builders and Lennox is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Builders FirstSource and Lennox International in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Lennox International and Builders FirstSource 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 Builders FirstSource are associated (or correlated) with Lennox International. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Lennox International has no effect on the direction of Builders FirstSource i.e., Builders FirstSource and Lennox International go up and down completely randomly.

Pair Corralation between Builders FirstSource and Lennox International

Given the investment horizon of 90 days Builders FirstSource is expected to generate 1.79 times less return on investment than Lennox International. In addition to that, Builders FirstSource is 1.76 times more volatile than Lennox International. It trades about 0.07 of its total potential returns per unit of risk. Lennox International is currently generating about 0.22 per unit of volatility. If you would invest  52,497  in Lennox International on April 25, 2025 and sell it today you would earn a total of  13,583  from holding Lennox International or generate 25.87% return on investment over 90 days.

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

Builders FirstSource  vs.  Lennox International

Builders FirstSource

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Builders FirstSource are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Even with relatively unfluctuating fundamental indicators, Builders FirstSource reported solid returns over the last few months and may actually be approaching a breakup point.

Lennox International

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Lennox International are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite fairly conflicting forward indicators, Lennox International demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Builders FirstSource and Lennox International

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

The idea behind Builders FirstSource and Lennox International 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.