Correlation Between European Wax and LGI Homes

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

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

Diversification Opportunities for European Wax and LGI Homes

0.88

Correlation Coefficient

European Wax  LGI Homes

Very poor diversification

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

Pair Corralation between European Wax and LGI Homes

Given the investment horizon of 90 days European Wax Center is expected to generate 0.84 times more return on investment than LGI Homes. However, European Wax Center is 1.19 times less risky than LGI Homes. It trades about -0.2 of its potential returns per unit of risk. LGI Homes is currently generating about -0.31 per unit of risk. If you would invest  1,289  in European Wax Center on January 30, 2024 and sell it today you would lose (123.00) from holding European Wax Center or give up 9.54% of portfolio value over 90 days.

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

European Wax Center  vs.  LGI Homes

European Wax Center

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days European Wax Center has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Stock's fundamental indicators remain fairly strong which may send shares a bit higher in May 2024. The current disturbance may also be a sign of long term up-swing for the company investors.

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 May 2024. The recent confusion may also be a sign of long-lasting up-swing for the firm traders.

Pair Trading with European Wax and LGI Homes

The main advantage of trading using opposite European Wax and LGI Homes positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if European Wax 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 European Wax Center 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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.