Correlation Between Tile Shop and Home Depot

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

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

Diversification Opportunities for Tile Shop and Home Depot

0.73

Correlation Coefficient

Tile Shop  Home Depot

Poor diversification

The 3 months correlation between Tile and Home is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Tile Shop Holdings and Home Depot in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Home Depot and Tile Shop 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 Tile Shop Holdings 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 Tile Shop i.e., Tile Shop and Home Depot go up and down completely randomly.

Pair Corralation between Tile Shop and Home Depot

Given the investment horizon of 90 days Tile Shop Holdings is expected to generate 1.34 times more return on investment than Home Depot. However, Tile Shop is 1.34 times more volatile than Home Depot. It trades about -0.01 of its potential returns per unit of risk. Home Depot is currently generating about -0.08 per unit of risk. If you would invest  666.00  in Tile Shop Holdings on December 26, 2024 and sell it today you would lose (15.00) from holding Tile Shop Holdings or give up 2.25% of portfolio value over 90 days.

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

Tile Shop Holdings  vs.  Home Depot

Tile Shop Holdings

Risk-Adjusted Performance

Very Weak

Over the last 90 days Tile Shop Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong basic indicators, Tile Shop is not utilizing all of its potentials. The newest stock price confusion, may contribute to short-horizon losses for the traders.

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 uncertain 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.

Pair Trading with Tile Shop and Home Depot

The main advantage of trading using opposite Tile Shop and Home Depot positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Tile Shop 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 Tile Shop Holdings 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.