Correlation Between KB Home and Hovnanian Enterprises

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

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

Diversification Opportunities for KB Home and Hovnanian Enterprises

0.88

Correlation Coefficient

KB Home  Hovnanian Enterprises

Very poor diversification

The 3 months correlation between KBH and Hovnanian is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding KB Home and Hovnanian Enterprises in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hovnanian Enterprises and KB Home 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 KB Home 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 KB Home i.e., KB Home and Hovnanian Enterprises go up and down completely randomly.

Pair Corralation between KB Home and Hovnanian Enterprises

Considering the 90-day investment horizon KB Home is expected to generate 1.44 times less return on investment than Hovnanian Enterprises. But when comparing it to its historical volatility, KB Home is 1.25 times less risky than Hovnanian Enterprises. It trades about 0.13 of its potential returns per unit of risk. Hovnanian Enterprises is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  17,539  in Hovnanian Enterprises on August 30, 2024 and sell it today you would earn a total of  1,513  from holding Hovnanian Enterprises or generate 8.63% return on investment over 90 days.

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

KB Home  vs.  Hovnanian Enterprises

KB Home

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days KB Home has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong fundamental drivers, KB Home is not utilizing all of its potentials. The recent stock price confusion, may contribute to short-horizon losses for the traders.

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 latest unsteady performance, the Stock's basic indicators remain stable and the latest fuss on Wall Street may also be a sign of long-term gains for the venture sophisticated investors.

Pair Trading with KB Home and Hovnanian Enterprises

The main advantage of trading using opposite KB Home and Hovnanian Enterprises positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if KB Home 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 KB Home 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.