Correlation Between Home Depot and Pinnacle West

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

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

Diversification Opportunities for Home Depot and Pinnacle West

0.61

Correlation Coefficient

Home Depot  Pinnacle West

Poor diversification

The 3 months correlation between Home and Pinnacle is 0.61. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and Pinnacle West Capital in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Pinnacle West Capital and Home Depot 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 Home Depot are associated (or correlated) with Pinnacle West. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Pinnacle West Capital has no effect on the direction of Home Depot i.e., Home Depot and Pinnacle West go up and down completely randomly.

Pair Corralation between Home Depot and Pinnacle West

Assuming the 90 days trading horizon Home Depot is expected to generate 10.67 times less return on investment than Pinnacle West. But when comparing it to its historical volatility, Home Depot is 6.51 times less risky than Pinnacle West. It trades about 0.12 of its potential returns per unit of risk. Pinnacle West Capital is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest  8,338  in Pinnacle West Capital on December 30, 2024 and sell it today you would earn a total of  1,133  from holding Pinnacle West Capital or generate 13.59% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	93.85%
Values	Daily Returns

Home Depot  vs.  Pinnacle West Capital

Home Depot

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Home Depot are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite quite persistent essential indicators, Home Depot is not utilizing all of its potentials. The newest stock price mess, may contribute to short-term losses for the institutional investors.

Pinnacle West Capital

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Pinnacle West Capital are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Pinnacle West unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Home Depot and Pinnacle West

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

The idea behind Home Depot and Pinnacle West Capital 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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.