Correlation Between Home Depot and Searchlight Resources

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

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

Diversification Opportunities for Home Depot and Searchlight Resources

0.28

Correlation Coefficient

Home Depot  Searchlight Resources

Modest diversification

The 3 months correlation between Home and Searchlight is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and Searchlight Resources in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Searchlight Resources 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 Searchlight Resources. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Searchlight Resources has no effect on the direction of Home Depot i.e., Home Depot and Searchlight Resources go up and down completely randomly.

Pair Corralation between Home Depot and Searchlight Resources

Allowing for the 90-day total investment horizon Home Depot is expected to under-perform the Searchlight Resources. But the stock apears to be less risky and, when comparing its historical volatility, Home Depot is 16.36 times less risky than Searchlight Resources. The stock trades about -0.07 of its potential returns per unit of risk. The Searchlight Resources is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest  0.68  in Searchlight Resources on December 29, 2024 and sell it today you would earn a total of  0.28  from holding Searchlight Resources or generate 41.18% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	96.83%
Values	Daily Returns

Home Depot  vs.  Searchlight Resources

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.

Searchlight Resources

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Searchlight Resources are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak basic indicators, Searchlight Resources reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Home Depot and Searchlight Resources

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

The idea behind Home Depot and Searchlight Resources 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 Analyzer module to portfolio analysis module that provides access to portfolio diagnostics and optimization engine.