Correlation Between Home Depot and Verizon Communications

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

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

Diversification Opportunities for Home Depot and Verizon Communications

0.69

Correlation Coefficient

Home Depot  Verizon Communications

Poor diversification

The 3 months correlation between Home and Verizon is 0.69. Overlapping area represents the amount of risk that can be diversified away by holding The Home Depot and Verizon Communications in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Verizon Communications 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 The Home Depot are associated (or correlated) with Verizon Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Verizon Communications has no effect on the direction of Home Depot i.e., Home Depot and Verizon Communications go up and down completely randomly.

Pair Corralation between Home Depot and Verizon Communications

Assuming the 90 days horizon The Home Depot is expected to under-perform the Verizon Communications. But the stock apears to be less risky and, when comparing its historical volatility, The Home Depot is 1.4 times less risky than Verizon Communications. The stock trades about -0.1 of its potential returns per unit of risk. The Verizon Communications is currently generating about -0.05 of returns per unit of risk over similar time horizon. If you would invest  83,200  in Verizon Communications on October 11, 2024 and sell it today you would lose (3,300) from holding Verizon Communications or give up 3.97% of portfolio value over 90 days.

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

The Home Depot  vs.  Verizon Communications

Home Depot

Risk-Adjusted Performance

0 of 100

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 fairly strong primary indicators, Home Depot is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Verizon Communications

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Verizon Communications has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong primary indicators, Verizon Communications is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Home Depot and Verizon Communications

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

The idea behind The Home Depot and Verizon Communications 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.