Correlation Between Fortune Brands and Builders FirstSource

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

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

Diversification Opportunities for Fortune Brands and Builders FirstSource

0.96

Correlation Coefficient

Fortune Brands  Builders FirstSource

Almost no diversification

The 3 months correlation between Fortune and Builders is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Fortune Brands Innovations and Builders FirstSource in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Builders FirstSource and Fortune Brands 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 Fortune Brands Innovations are associated (or correlated) with Builders FirstSource. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Builders FirstSource has no effect on the direction of Fortune Brands i.e., Fortune Brands and Builders FirstSource go up and down completely randomly.

Pair Corralation between Fortune Brands and Builders FirstSource

Given the investment horizon of 90 days Fortune Brands is expected to generate 1.17 times less return on investment than Builders FirstSource. But when comparing it to its historical volatility, Fortune Brands Innovations is 1.46 times less risky than Builders FirstSource. It trades about 0.3 of its potential returns per unit of risk. Builders FirstSource is currently generating about 0.24 of returns per unit of risk over similar time horizon. If you would invest  15,286  in Builders FirstSource on July 8, 2024 and sell it today you would earn a total of  3,942  from holding Builders FirstSource or generate 25.79% return on investment over 90 days.

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

Fortune Brands Innovations  vs.  Builders FirstSource

Fortune Brands Innov

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Fortune Brands Innovations are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of very uncertain forward indicators, Fortune Brands displayed solid returns over the last few months and may actually be approaching a breakup point.

Builders FirstSource

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Builders FirstSource are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Even with relatively fragile fundamental indicators, Builders FirstSource reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Fortune Brands and Builders FirstSource

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

The idea behind Fortune Brands Innovations and Builders FirstSource 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.

Check out your portfolio center.

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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.