Correlation Between DFS Furniture and Home Depot

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

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

Diversification Opportunities for DFS Furniture and Home Depot

0.62

Correlation Coefficient

DFS Furniture  Home Depot

Poor diversification

The 3 months correlation between DFS and Home is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding DFS Furniture PLC and Home Depot in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Home Depot and DFS Furniture 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 DFS Furniture PLC 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 DFS Furniture i.e., DFS Furniture and Home Depot go up and down completely randomly.

Pair Corralation between DFS Furniture and Home Depot

Assuming the 90 days trading horizon DFS Furniture PLC is expected to generate 12.16 times more return on investment than Home Depot. However, DFS Furniture is 12.16 times more volatile than Home Depot. It trades about 0.09 of its potential returns per unit of risk. Home Depot is currently generating about 0.14 per unit of risk. If you would invest  11,600  in DFS Furniture PLC on September 21, 2024 and sell it today you would earn a total of  2,300  from holding DFS Furniture PLC or generate 19.83% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.13%
Values	Daily Returns

DFS Furniture PLC  vs.  Home Depot

DFS Furniture PLC

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in DFS Furniture PLC are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain technical and fundamental indicators, DFS Furniture exhibited solid returns over the last few months and may actually be approaching a breakup point.

Home Depot

Risk-Adjusted Performance

9 of 100

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 latest stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with DFS Furniture and Home Depot

The main advantage of trading using opposite DFS Furniture and Home Depot positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if DFS Furniture 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 DFS Furniture PLC and 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 Equity Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.