Correlation Between United States and Home Depot

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

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

Diversification Opportunities for United States and Home Depot

0.16

Correlation Coefficient

United States  Home Depot

Average diversification

The 3 months correlation between United and Home is 0.16. Overlapping area represents the amount of risk that can be diversified away by holding United States Steel and The Home Depot in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Home Depot and United States 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 United States Steel 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 United States i.e., United States and Home Depot go up and down completely randomly.

Pair Corralation between United States and Home Depot

Given the investment horizon of 90 days United States Steel is expected to generate 1.87 times more return on investment than Home Depot. However, United States is 1.87 times more volatile than The Home Depot. It trades about 0.19 of its potential returns per unit of risk. The Home Depot is currently generating about -0.08 per unit of risk. If you would invest  59,927  in United States Steel on December 20, 2024 and sell it today you would earn a total of  23,373  from holding United States Steel or generate 39.0% return on investment over 90 days.

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

United States Steel  vs.  The Home Depot

United States Steel

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in United States Steel are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak primary indicators, United States showed solid returns over the last few months and may actually be approaching a breakup point.

Home Depot

Risk-Adjusted Performance

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 latest unsteady performance, the Stock's primary indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

Pair Trading with United States and Home Depot

The main advantage of trading using opposite United States and Home Depot positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if United States 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 United States Steel 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.