Correlation Between Builders FirstSource and Trane Technologies

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

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

Diversification Opportunities for Builders FirstSource and Trane Technologies

-0.28

Correlation Coefficient

Builders FirstSource  Trane Technologies

Very good diversification

The 3 months correlation between Builders and Trane is -0.28. Overlapping area represents the amount of risk that can be diversified away by holding Builders FirstSource and Trane Technologies plc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Trane Technologies plc and Builders FirstSource 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 Builders FirstSource are associated (or correlated) with Trane Technologies. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Trane Technologies plc has no effect on the direction of Builders FirstSource i.e., Builders FirstSource and Trane Technologies go up and down completely randomly.

Pair Corralation between Builders FirstSource and Trane Technologies

Given the investment horizon of 90 days Builders FirstSource is expected to under-perform the Trane Technologies. In addition to that, Builders FirstSource is 3.1 times more volatile than Trane Technologies plc. It trades about -0.06 of its total potential returns per unit of risk. Trane Technologies plc is currently generating about 0.35 per unit of volatility. If you would invest  29,388  in Trane Technologies plc on February 15, 2024 and sell it today you would earn a total of  3,618  from holding Trane Technologies plc or generate 12.31% return on investment over 90 days.

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

Builders FirstSource  vs.  Trane Technologies plc

Builders FirstSource

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Builders FirstSource has generated negative risk-adjusted returns adding no value to investors with long positions. Even with latest fragile performance, the Stock's fundamental indicators remain invariable and the latest agitation on Wall Street may also be a sign of long-running gains for the enterprise retail investors.

Trane Technologies plc

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Trane Technologies plc are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating basic indicators, Trane Technologies unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Builders FirstSource and Trane Technologies

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

The idea behind Builders FirstSource and Trane Technologies plc 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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.