Correlation Between Home Depot and Urban Outfitters

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

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

Diversification Opportunities for Home Depot and Urban Outfitters

-0.43

Correlation Coefficient

Home Depot  Urban Outfitters

Very good diversification

The 3 months correlation between Home and Urban is -0.43. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and Urban Outfitters in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Urban Outfitters 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 Urban Outfitters. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Urban Outfitters has no effect on the direction of Home Depot i.e., Home Depot and Urban Outfitters go up and down completely randomly.

Pair Corralation between Home Depot and Urban Outfitters

Allowing for the 90-day total investment horizon Home Depot is expected to generate 2.85 times less return on investment than Urban Outfitters. But when comparing it to its historical volatility, Home Depot is 2.07 times less risky than Urban Outfitters. It trades about 0.05 of its potential returns per unit of risk. Urban Outfitters is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  3,250  in Urban Outfitters on December 2, 2024 and sell it today you would earn a total of  2,569  from holding Urban Outfitters or generate 79.05% return on investment over 90 days.

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

Home Depot  vs.  Urban Outfitters

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.

Urban Outfitters

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Urban Outfitters are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of very unfluctuating fundamental drivers, Urban Outfitters displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Home Depot and Urban Outfitters

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

The idea behind Home Depot and Urban Outfitters 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 Odds Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.