Correlation Between Home Depot and OReilly Automotive

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

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

Diversification Opportunities for Home Depot and OReilly Automotive

-0.29

Correlation Coefficient

Home Depot  OReilly Automotive

Very good diversification

The 3 months correlation between Home and OReilly is -0.29. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and OReilly Automotive in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on OReilly Automotive 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 OReilly Automotive. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of OReilly Automotive has no effect on the direction of Home Depot i.e., Home Depot and OReilly Automotive go up and down completely randomly.

Pair Corralation between Home Depot and OReilly Automotive

Allowing for the 90-day total investment horizon Home Depot is expected to under-perform the OReilly Automotive. In addition to that, Home Depot is 1.2 times more volatile than OReilly Automotive. It trades about -0.07 of its total potential returns per unit of risk. OReilly Automotive is currently generating about 0.26 per unit of volatility. If you would invest  117,992  in OReilly Automotive on December 28, 2024 and sell it today you would earn a total of  24,370  from holding OReilly Automotive or generate 20.65% return on investment over 90 days.

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

Home Depot  vs.  OReilly Automotive

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 rather sound fundamental indicators, Home Depot is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

OReilly Automotive

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in OReilly Automotive are ranked lower than 20 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak essential indicators, OReilly Automotive showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Home Depot and OReilly Automotive

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

The idea behind Home Depot and OReilly Automotive 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.