Correlation Between Home Depot and Valero Energy

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Can any of the company-specific risk be diversified away by investing in both Home Depot and Valero Energy 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 Valero Energy into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between The Home Depot and Valero Energy, you can compare the effects of market volatilities on Home Depot and Valero Energy 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 Valero Energy. Check out your portfolio center. Please also check ongoing floating volatility patterns of Home Depot and Valero Energy.

Diversification Opportunities for Home Depot and Valero Energy

0.68
  Correlation Coefficient

Poor diversification

The 3 months correlation between Home and Valero is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding The Home Depot and Valero Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Valero Energy 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 The Home Depot are associated (or correlated) with Valero Energy. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Valero Energy has no effect on the direction of Home Depot i.e., Home Depot and Valero Energy go up and down completely randomly.

Pair Corralation between Home Depot and Valero Energy

Assuming the 90 days trading horizon Home Depot is expected to generate 1.45 times less return on investment than Valero Energy. But when comparing it to its historical volatility, The Home Depot is 1.42 times less risky than Valero Energy. It trades about 0.09 of its potential returns per unit of risk. Valero Energy is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  12,134  in Valero Energy on October 25, 2024 and sell it today you would earn a total of  1,264  from holding Valero Energy or generate 10.42% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

The Home Depot  vs.  Valero Energy

 Performance 
       Timeline  
Home Depot 

Risk-Adjusted Performance

7 of 100

 
Weak
 
Strong
OK
Compared to the overall equity markets, risk-adjusted returns on investments in The Home Depot are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile forward indicators, Home Depot may actually be approaching a critical reversion point that can send shares even higher in February 2025.
Valero Energy 

Risk-Adjusted Performance

7 of 100

 
Weak
 
Strong
OK
Compared to the overall equity markets, risk-adjusted returns on investments in Valero Energy are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, Valero Energy may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Home Depot and Valero Energy Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Home Depot and Valero Energy

The main advantage of trading using opposite Home Depot and Valero Energy positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Home Depot position performs unexpectedly, Valero Energy 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 Valero Energy will offset losses from the drop in Valero Energy's long position.
The idea behind The Home Depot and Valero Energy 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.

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