Correlation Between Home Depot and China Health

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

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

Diversification Opportunities for Home Depot and China Health

-0.23

Correlation Coefficient

Home Depot  China Health

Very good diversification

The 3 months correlation between Home and China is -0.23. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and China Health Management in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Health Management 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 China Health. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Health Management has no effect on the direction of Home Depot i.e., Home Depot and China Health go up and down completely randomly.

Pair Corralation between Home Depot and China Health

Allowing for the 90-day total investment horizon Home Depot is expected to under-perform the China Health. But the stock apears to be less risky and, when comparing its historical volatility, Home Depot is 8.36 times less risky than China Health. The stock trades about -0.08 of its potential returns per unit of risk. The China Health Management is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  0.40  in China Health Management on December 26, 2024 and sell it today you would earn a total of  0.09  from holding China Health Management or generate 22.5% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	96.83%
Values	Daily Returns

Home Depot  vs.  China Health Management

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.

China Health Management

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in China Health Management are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather inconsistent technical indicators, China Health exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Home Depot and China Health

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

The idea behind Home Depot and China Health Management 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.

Check out your portfolio center.

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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.