Correlation Between CVS Health and Home Depot

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

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

Diversification Opportunities for CVS Health and Home Depot

-0.17

Correlation Coefficient

CVS Health  Home Depot

Good diversification

The 3 months correlation between CVS and Home is -0.17. Overlapping area represents the amount of risk that can be diversified away by holding CVS Health and The Home Depot in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Home Depot and CVS Health 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 CVS Health are associated (or correlated) with Home Depot. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Home Depot has no effect on the direction of CVS Health i.e., CVS Health and Home Depot go up and down completely randomly.

Pair Corralation between CVS Health and Home Depot

Assuming the 90 days trading horizon CVS Health is expected to generate 1.71 times more return on investment than Home Depot. However, CVS Health is 1.71 times more volatile than The Home Depot. It trades about 0.22 of its potential returns per unit of risk. The Home Depot is currently generating about -0.13 per unit of risk. If you would invest  91,247  in CVS Health on December 18, 2024 and sell it today you would earn a total of  41,053  from holding CVS Health or generate 44.99% return on investment over 90 days.

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

CVS Health  vs.  The Home Depot

CVS Health

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in CVS Health are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, CVS Health showed solid returns over the last few months and may actually be approaching a breakup point.

Home Depot

Risk-Adjusted Performance

Very Weak

Over the last 90 days The Home Depot has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's primary indicators remain fairly strong which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with CVS Health and Home Depot

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

The idea behind CVS Health and The Home Depot 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.