Correlation Between Home Depot and NextSource Materials

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

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

Diversification Opportunities for Home Depot and NextSource Materials

-0.75

Correlation Coefficient

Home Depot  NextSource Materials

Pay attention - limited upside

The 3 months correlation between Home and NextSource is -0.75. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and NextSource Materials in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NextSource Materials 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 NextSource Materials. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NextSource Materials has no effect on the direction of Home Depot i.e., Home Depot and NextSource Materials go up and down completely randomly.

Pair Corralation between Home Depot and NextSource Materials

Allowing for the 90-day total investment horizon Home Depot is expected to generate 0.24 times more return on investment than NextSource Materials. However, Home Depot is 4.21 times less risky than NextSource Materials. It trades about 0.28 of its potential returns per unit of risk. NextSource Materials is currently generating about 0.05 per unit of risk. If you would invest  40,377  in Home Depot on September 9, 2024 and sell it today you would earn a total of  2,760  from holding Home Depot or generate 6.84% return on investment over 90 days.

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

Home Depot  vs.  NextSource Materials

Home Depot

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Home Depot are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain fundamental indicators, Home Depot exhibited solid returns over the last few months and may actually be approaching a breakup point.

NextSource Materials

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days NextSource Materials has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest fragile performance, the Stock's fundamental indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with Home Depot and NextSource Materials

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

The idea behind Home Depot and NextSource Materials 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 Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.