Correlation Between Home Depot and IShares Morningstar

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

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

Diversification Opportunities for Home Depot and IShares Morningstar

0.92

Correlation Coefficient

Home Depot  IShares Morningstar

Almost no diversification

The 3 months correlation between Home and IShares is 0.92. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and iShares Morningstar Small Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Morningstar 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 IShares Morningstar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Morningstar has no effect on the direction of Home Depot i.e., Home Depot and IShares Morningstar go up and down completely randomly.

Pair Corralation between Home Depot and IShares Morningstar

Allowing for the 90-day total investment horizon Home Depot is expected to under-perform the IShares Morningstar. In addition to that, Home Depot is 1.32 times more volatile than iShares Morningstar Small Cap. It trades about -0.11 of its total potential returns per unit of risk. iShares Morningstar Small Cap is currently generating about -0.08 per unit of volatility. If you would invest  5,885  in iShares Morningstar Small Cap on December 18, 2024 and sell it today you would lose (317.00) from holding iShares Morningstar Small Cap or give up 5.39% of portfolio value over 90 days.

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

Home Depot  vs.  iShares Morningstar Small Cap

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 unsteady 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.

iShares Morningstar

Risk-Adjusted Performance

Very Weak

Over the last 90 days iShares Morningstar Small Cap has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong fundamental indicators, IShares Morningstar is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Home Depot and IShares Morningstar

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

The idea behind Home Depot and iShares Morningstar Small Cap 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.