Correlation Between HOME DEPOT and Richelieu Hardware

Can any of the company-specific risk be diversified away by investing in both HOME DEPOT and Richelieu Hardware 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 Richelieu Hardware into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between HOME DEPOT CDR and Richelieu Hardware, you can compare the effects of market volatilities on HOME DEPOT and Richelieu Hardware 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 Richelieu Hardware. Check out your portfolio center. Please also check ongoing floating volatility patterns of HOME DEPOT and Richelieu Hardware.

Diversification Opportunities for HOME DEPOT and Richelieu Hardware

0.68

Correlation Coefficient

HOME DEPOT  Richelieu Hardware

Poor diversification

The 3 months correlation between HOME and Richelieu is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding HOME DEPOT CDR and Richelieu Hardware in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Richelieu Hardware 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 CDR are associated (or correlated) with Richelieu Hardware. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Richelieu Hardware has no effect on the direction of HOME DEPOT i.e., HOME DEPOT and Richelieu Hardware go up and down completely randomly.

Pair Corralation between HOME DEPOT and Richelieu Hardware

Assuming the 90 days trading horizon HOME DEPOT CDR is expected to under-perform the Richelieu Hardware. But the stock apears to be less risky and, when comparing its historical volatility, HOME DEPOT CDR is 1.02 times less risky than Richelieu Hardware. The stock trades about -0.05 of its potential returns per unit of risk. The Richelieu Hardware is currently generating about -0.02 of returns per unit of risk over similar time horizon. If you would invest  3,978  in Richelieu Hardware on October 7, 2024 and sell it today you would lose (99.00) from holding Richelieu Hardware or give up 2.49% of portfolio value over 90 days.

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

HOME DEPOT CDR  vs.  Richelieu Hardware

HOME DEPOT CDR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days HOME DEPOT CDR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, HOME DEPOT is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Richelieu Hardware

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Richelieu Hardware has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy technical indicators, Richelieu Hardware is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with HOME DEPOT and Richelieu Hardware

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

The idea behind HOME DEPOT CDR and Richelieu Hardware 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.