Correlation Between Home Depot and First Trust

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

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

Diversification Opportunities for Home Depot and First Trust

-0.41

Correlation Coefficient

Home Depot  First Trust

Very good diversification

The 3 months correlation between Home and First is -0.41. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and First Trust TCW in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust TCW 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 First Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Trust TCW has no effect on the direction of Home Depot i.e., Home Depot and First Trust go up and down completely randomly.

Pair Corralation between Home Depot and First Trust

Allowing for the 90-day total investment horizon Home Depot is expected to generate 3.04 times more return on investment than First Trust. However, Home Depot is 3.04 times more volatile than First Trust TCW. It trades about 0.21 of its potential returns per unit of risk. First Trust TCW is currently generating about -0.03 per unit of risk. If you would invest  36,657  in Home Depot on August 30, 2024 and sell it today you would earn a total of  6,062  from holding Home Depot or generate 16.54% return on investment over 90 days.

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

Home Depot  vs.  First Trust TCW

Home Depot

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Home Depot are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady fundamental indicators, Home Depot exhibited solid returns over the last few months and may actually be approaching a breakup point.

First Trust TCW

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days First Trust TCW has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound technical and fundamental indicators, First Trust is not utilizing all of its potentials. The recent stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Home Depot and First Trust

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

The idea behind Home Depot and First Trust TCW 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 Center module to all portfolio management and optimization tools to improve performance of your portfolios.