Correlation Between SIMS METAL and Home Depot

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

By analyzing existing cross correlation between SIMS METAL MGT and The Home Depot, you can compare the effects of market volatilities on SIMS METAL and Home Depot 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 SIMS METAL with a short position of Home Depot. Check out your portfolio center. Please also check ongoing floating volatility patterns of SIMS METAL and Home Depot.

Diversification Opportunities for SIMS METAL and Home Depot

0.2

Correlation Coefficient

SIMS METAL  Home Depot

Modest diversification

The 3 months correlation between SIMS and Home is 0.2. Overlapping area represents the amount of risk that can be diversified away by holding SIMS METAL MGT and The Home Depot in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Home Depot and SIMS METAL 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 SIMS METAL MGT are associated (or correlated) with Home Depot. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Home Depot has no effect on the direction of SIMS METAL i.e., SIMS METAL and Home Depot go up and down completely randomly.

Pair Corralation between SIMS METAL and Home Depot

Assuming the 90 days trading horizon SIMS METAL is expected to generate 2.94 times less return on investment than Home Depot. In addition to that, SIMS METAL is 1.96 times more volatile than The Home Depot. It trades about 0.02 of its total potential returns per unit of risk. The Home Depot is currently generating about 0.12 per unit of volatility. If you would invest  36,705  in The Home Depot on October 22, 2024 and sell it today you would earn a total of  3,240  from holding The Home Depot or generate 8.83% return on investment over 90 days.

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

SIMS METAL MGT  vs.  The Home Depot

SIMS METAL MGT

Risk-Adjusted Performance

1 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in SIMS METAL MGT are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound primary indicators, SIMS METAL is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Home Depot

Risk-Adjusted Performance

9 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in The Home Depot are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain forward indicators, Home Depot may actually be approaching a critical reversion point that can send shares even higher in February 2025.

Pair Trading with SIMS METAL and Home Depot

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

The idea behind SIMS METAL MGT and The Home Depot 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 Economic Indicators module to top statistical indicators that provide insights into how an economy is performing.