Correlation Between Home Depot and RH

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

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

Diversification Opportunities for Home Depot and RH

0.49

Correlation Coefficient

Home Depot  RH

Very weak diversification

The 3 months correlation between Home and RH is 0.49. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and RH in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on RH 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 RH. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of RH has no effect on the direction of Home Depot i.e., Home Depot and RH go up and down completely randomly.

Pair Corralation between Home Depot and RH

Allowing for the 90-day total investment horizon Home Depot is expected to under-perform the RH. But the stock apears to be less risky and, when comparing its historical volatility, Home Depot is 3.65 times less risky than RH. The stock trades about -0.22 of its potential returns per unit of risk. The RH is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  36,801  in RH on September 23, 2024 and sell it today you would earn a total of  3,025  from holding RH or generate 8.22% return on investment over 90 days.

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

Home Depot  vs.  RH

Home Depot

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Home Depot are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, Home Depot is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

RH

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in RH are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite fairly unsteady technical indicators, RH demonstrated solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Home Depot and RH

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

The idea behind Home Depot and RH 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.