Correlation Between DR Horton and KB Home

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

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

Diversification Opportunities for DR Horton and KB Home

0.86

Correlation Coefficient

DR Horton  KB Home

Very poor diversification

The 3 months correlation between DHI and KBH is 0.86. Overlapping area represents the amount of risk that can be diversified away by holding DR Horton and KB Home in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on KB Home and DR Horton 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 DR Horton 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 DR Horton i.e., DR Horton and KB Home go up and down completely randomly.

Pair Corralation between DR Horton and KB Home

Considering the 90-day investment horizon DR Horton is expected to under-perform the KB Home. But the stock apears to be less risky and, when comparing its historical volatility, DR Horton is 1.0 times less risky than KB Home. The stock trades about -0.17 of its potential returns per unit of risk. The KB Home is currently generating about -0.1 of returns per unit of risk over similar time horizon. If you would invest  6,818  in KB Home on January 26, 2024 and sell it today you would lose (339.00) from holding KB Home or give up 4.97% of portfolio value over 90 days.

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

DR Horton  vs.  KB Home

DR Horton

Risk-Adjusted Performance

3 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in DR Horton are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite fairly strong technical indicators, DR Horton is not utilizing all of its potentials. The recent stock price confusion, may contribute to short-horizon losses for the traders.

KB Home

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in KB Home are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite fairly inconsistent fundamental drivers, KB Home may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Pair Trading with DR Horton and KB Home

The main advantage of trading using opposite DR Horton and KB Home positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if DR Horton 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 DR Horton 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 Portfolio Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.