Correlation Between Smith Douglas and LGI Homes

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

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

Diversification Opportunities for Smith Douglas and LGI Homes

0.82

Correlation Coefficient

Smith Douglas  LGI Homes

Very poor diversification

The 3 months correlation between Smith and LGI is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Smith Douglas Homes and LGI Homes in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on LGI Homes and Smith Douglas 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 Smith Douglas Homes 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 Smith Douglas i.e., Smith Douglas and LGI Homes go up and down completely randomly.

Pair Corralation between Smith Douglas and LGI Homes

Given the investment horizon of 90 days Smith Douglas Homes is expected to generate 1.32 times more return on investment than LGI Homes. However, Smith Douglas is 1.32 times more volatile than LGI Homes. It trades about -0.12 of its potential returns per unit of risk. LGI Homes is currently generating about -0.16 per unit of risk. If you would invest  3,573  in Smith Douglas Homes on September 24, 2024 and sell it today you would lose (818.00) from holding Smith Douglas Homes or give up 22.89% of portfolio value over 90 days.

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

Smith Douglas Homes  vs.  LGI Homes

Smith Douglas Homes

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Smith Douglas Homes has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of inconsistent performance in the last few months, the Stock's technical indicators remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

LGI Homes

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days LGI Homes has generated negative risk-adjusted returns adding no value to investors with long positions. Despite unfluctuating performance in the last few months, the Stock's forward indicators remain fairly strong which may send shares a bit higher in January 2025. The recent confusion may also be a sign of long-lasting up-swing for the firm traders.

Pair Trading with Smith Douglas and LGI Homes

The main advantage of trading using opposite Smith Douglas and LGI Homes positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Smith Douglas 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 Smith Douglas Homes 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 Portfolio Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.