Correlation Between Home Depot and Energy

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

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

Diversification Opportunities for Home Depot and Energy

-0.81

Correlation Coefficient

Home Depot  Energy

Pay attention - limited upside

The 3 months correlation between Home and Energy is -0.81. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and Energy and Water in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Energy and Water 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 Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Energy and Water has no effect on the direction of Home Depot i.e., Home Depot and Energy go up and down completely randomly.

Pair Corralation between Home Depot and Energy

Allowing for the 90-day total investment horizon Home Depot is expected to generate 0.08 times more return on investment than Energy. However, Home Depot is 12.0 times less risky than Energy. It trades about 0.22 of its potential returns per unit of risk. Energy and Water is currently generating about -0.22 per unit of risk. If you would invest  36,283  in Home Depot on September 3, 2024 and sell it today you would earn a total of  6,413  from holding Home Depot or generate 17.67% return on investment over 90 days.

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

Home Depot  vs.  Energy and Water

Home Depot

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Home Depot are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile fundamental indicators, Home Depot exhibited solid returns over the last few months and may actually be approaching a breakup point.

Energy and Water

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Energy and Water has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fragile performance in the last few months, the Stock's basic indicators remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with Home Depot and Energy

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

The idea behind Home Depot and Energy and Water 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.