Correlation Between Home Depot and Bodycote PLC

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

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

Diversification Opportunities for Home Depot and Bodycote PLC

0.84

Correlation Coefficient

Home Depot  Bodycote PLC

Very poor diversification

The 3 months correlation between Home and Bodycote is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and Bodycote PLC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bodycote PLC and Home Depot 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 Home Depot are associated (or correlated) with Bodycote PLC. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bodycote PLC has no effect on the direction of Home Depot i.e., Home Depot and Bodycote PLC go up and down completely randomly.

Pair Corralation between Home Depot and Bodycote PLC

Assuming the 90 days trading horizon Home Depot is expected to generate 1.43 times less return on investment than Bodycote PLC. But when comparing it to its historical volatility, Home Depot is 4.23 times less risky than Bodycote PLC. It trades about 0.22 of its potential returns per unit of risk. Bodycote PLC is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  61,600  in Bodycote PLC on September 24, 2024 and sell it today you would earn a total of  1,100  from holding Bodycote PLC or generate 1.79% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	95.24%
Values	Daily Returns

Home Depot  vs.  Bodycote PLC

Home Depot

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Home Depot are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, Home Depot is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Bodycote PLC

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Bodycote PLC are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady technical and fundamental indicators, Bodycote PLC may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Home Depot and Bodycote PLC

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

The idea behind Home Depot and Bodycote PLC 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..