Correlation Between Home Depot and First Trust

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Can any of the company-specific risk be diversified away by investing in both Home Depot and First Trust 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 First Trust into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Home Depot and First Trust STOXX, you can compare the effects of market volatilities on Home Depot and First Trust 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 First Trust. Check out your portfolio center. Please also check ongoing floating volatility patterns of Home Depot and First Trust.

Diversification Opportunities for Home Depot and First Trust

HomeFirstDiversified AwayHomeFirstDiversified Away100%
0.05
  Correlation Coefficient

Significant diversification

The 3 months correlation between Home and First is 0.05. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and First Trust STOXX in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust STOXX 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 First Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Trust STOXX has no effect on the direction of Home Depot i.e., Home Depot and First Trust go up and down completely randomly.

Pair Corralation between Home Depot and First Trust

Allowing for the 90-day total investment horizon Home Depot is expected to generate 1.5 times more return on investment than First Trust. However, Home Depot is 1.5 times more volatile than First Trust STOXX. It trades about -0.05 of its potential returns per unit of risk. First Trust STOXX is currently generating about -0.09 per unit of risk. If you would invest  40,592  in Home Depot on October 5, 2024 and sell it today you would lose (1,746) from holding Home Depot or give up 4.3% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthInsignificant
Accuracy100.0%
ValuesDaily Returns

Home Depot  vs.  First Trust STOXX

 Performance 
JavaScript chart by amCharts 3.21.15OctNovDec -10-505
JavaScript chart by amCharts 3.21.15HD FDD
       Timeline  
Home Depot 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
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 rather sound fundamental indicators, Home Depot is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.
JavaScript chart by amCharts 3.21.15NovDecDecJan380390400410420430
First Trust STOXX 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days First Trust STOXX has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, First Trust is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.
JavaScript chart by amCharts 3.21.15NovDecDecJan1111.211.411.611.8

Home Depot and First Trust Volatility Contrast

   Predicted Return Density   
JavaScript chart by amCharts 3.21.15-2.06-1.55-1.04-0.53-0.04290.440.951.461.97 0.10.20.30.40.5
JavaScript chart by amCharts 3.21.15HD FDD
       Returns  

Pair Trading with Home Depot and First Trust

The main advantage of trading using opposite Home Depot and First Trust positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Home Depot position performs unexpectedly, First Trust 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 First Trust will offset losses from the drop in First Trust's long position.
The idea behind Home Depot and First Trust STOXX 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 Dashboard module to portfolio dashboard that provides centralized access to all your investments.

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