Correlation Between Home Depot and CVS Health

Can any of the company-specific risk be diversified away by investing in both Home Depot and CVS 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 CVS 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 CVS Health Corp, you can compare the effects of market volatilities on Home Depot and CVS 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 CVS Health. Check out your portfolio center. Please also check ongoing floating volatility patterns of Home Depot and CVS Health.

Diversification Opportunities for Home Depot and CVS Health

-0.4

Correlation Coefficient

Home Depot  CVS Health

Very good diversification

The 3 months correlation between Home and CVS is -0.4. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and CVS Health Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CVS Health Corp 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 CVS Health. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CVS Health Corp has no effect on the direction of Home Depot i.e., Home Depot and CVS Health go up and down completely randomly.

Pair Corralation between Home Depot and CVS Health

Allowing for the 90-day total investment horizon Home Depot is expected to under-perform the CVS Health. But the stock apears to be less risky and, when comparing its historical volatility, Home Depot is 1.78 times less risky than CVS Health. The stock trades about -0.09 of its potential returns per unit of risk. The CVS Health Corp is currently generating about 0.27 of returns per unit of risk over similar time horizon. If you would invest  4,436  in CVS Health Corp on December 26, 2024 and sell it today you would earn a total of  2,212  from holding CVS Health Corp or generate 49.86% return on investment over 90 days.

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

Home Depot  vs.  CVS Health Corp

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.

CVS Health Corp

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in CVS Health Corp are ranked lower than 21 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating basic indicators, CVS Health unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Home Depot and CVS Health

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

The idea behind Home Depot and CVS Health Corp 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..