Correlation Between KB Home and Home Depot

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

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

Diversification Opportunities for KB Home and Home Depot

-0.12

Correlation Coefficient

KB Home  Home Depot

Good diversification

The 3 months correlation between KBH and Home is -0.12. Overlapping area represents the amount of risk that can be diversified away by holding KB Home and The Home Depot in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Home Depot and KB Home 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 KB Home 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 KB Home i.e., KB Home and Home Depot go up and down completely randomly.

Pair Corralation between KB Home and Home Depot

Assuming the 90 days trading horizon KB Home is expected to under-perform the Home Depot. In addition to that, KB Home is 1.47 times more volatile than The Home Depot. It trades about -0.17 of its total potential returns per unit of risk. The Home Depot is currently generating about -0.01 per unit of volatility. If you would invest  800,348  in The Home Depot on October 9, 2024 and sell it today you would lose (10,346) from holding The Home Depot or give up 1.29% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.36%
Values	Daily Returns

KB Home  vs.  The Home Depot

KB Home

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days KB Home has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's technical indicators remain fairly strong which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long term up-swing for the company investors.

Home Depot

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days The Home Depot has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong primary indicators, Home Depot is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with KB Home and Home Depot

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

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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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.