Correlation Between Home Depot and American Cannabis

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

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

Diversification Opportunities for Home Depot and American Cannabis

-0.11

Correlation Coefficient

Home Depot  American Cannabis

Good diversification

The 3 months correlation between Home and American is -0.11. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and American Cannabis in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Cannabis 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 American Cannabis. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Cannabis has no effect on the direction of Home Depot i.e., Home Depot and American Cannabis go up and down completely randomly.

Pair Corralation between Home Depot and American Cannabis

Allowing for the 90-day total investment horizon Home Depot is expected to under-perform the American Cannabis. But the stock apears to be less risky and, when comparing its historical volatility, Home Depot is 114.34 times less risky than American Cannabis. The stock trades about -0.08 of its potential returns per unit of risk. The American Cannabis is currently generating about 0.2 of returns per unit of risk over similar time horizon. If you would invest  0.10  in American Cannabis on December 25, 2024 and sell it today you would earn a total of  0.00  from holding American Cannabis or generate 0.0% return on investment over 90 days.

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

Home Depot  vs.  American Cannabis

Home Depot

Risk-Adjusted Performance

Very Weak

Over the last 90 days Home Depot has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

American Cannabis

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in American Cannabis are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Even with relatively inconsistent primary indicators, American Cannabis revealed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Home Depot and American Cannabis

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

The idea behind Home Depot and American Cannabis 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.