Correlation Between Johnson Johnson and Home Depot

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

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

Diversification Opportunities for Johnson Johnson and Home Depot

-0.59

Correlation Coefficient

Johnson Johnson  Home Depot

Excellent diversification

The 3 months correlation between Johnson and Home is -0.59. Overlapping area represents the amount of risk that can be diversified away by holding Johnson Johnson and Home Depot in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Home Depot and Johnson Johnson 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 Johnson Johnson 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 Johnson Johnson i.e., Johnson Johnson and Home Depot go up and down completely randomly.

Pair Corralation between Johnson Johnson and Home Depot

Considering the 90-day investment horizon Johnson Johnson is expected to under-perform the Home Depot. But the stock apears to be less risky and, when comparing its historical volatility, Johnson Johnson is 1.51 times less risky than Home Depot. The stock trades about -0.13 of its potential returns per unit of risk. The Home Depot is currently generating about 0.23 of returns per unit of risk over similar time horizon. If you would invest  36,283  in Home Depot on August 31, 2024 and sell it today you would earn a total of  6,436  from holding Home Depot or generate 17.74% return on investment over 90 days.

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

Johnson Johnson  vs.  Home Depot

Johnson Johnson

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Johnson Johnson has generated negative risk-adjusted returns adding no value to investors with long positions. Even with latest unsteady performance, the Stock's basic indicators remain steady and the new chaos on Wall Street may also be a sign of medium-term gains for the company stakeholders.

Home Depot

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Home Depot are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of rather sluggish fundamental indicators, Home Depot exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Johnson Johnson and Home Depot

The main advantage of trading using opposite Johnson Johnson and Home Depot positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Johnson Johnson 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 Johnson Johnson and 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.

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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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.