Correlation Between Monster Beverage and Home Depot

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

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

Diversification Opportunities for Monster Beverage and Home Depot

0.8

Correlation Coefficient

Monster Beverage  Home Depot

Very poor diversification

The 3 months correlation between Monster and Home is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Monster Beverage and The Home Depot in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Home Depot and Monster Beverage 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 Monster Beverage 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 Monster Beverage i.e., Monster Beverage and Home Depot go up and down completely randomly.

Pair Corralation between Monster Beverage and Home Depot

Assuming the 90 days trading horizon Monster Beverage is expected to generate 1.02 times less return on investment than Home Depot. In addition to that, Monster Beverage is 1.38 times more volatile than The Home Depot. It trades about 0.2 of its total potential returns per unit of risk. The Home Depot is currently generating about 0.28 per unit of volatility. If you would invest  7,330  in The Home Depot on September 4, 2024 and sell it today you would earn a total of  1,747  from holding The Home Depot or generate 23.83% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	98.41%
Values	Daily Returns

Monster Beverage  vs.  The Home Depot

Monster Beverage

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Monster Beverage are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Monster Beverage sustained solid returns over the last few months and may actually be approaching a breakup point.

Home Depot

Risk-Adjusted Performance

22 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in The Home Depot are ranked lower than 22 (%) of all global equities and portfolios over the last 90 days. Despite somewhat uncertain primary indicators, Home Depot sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Monster Beverage and Home Depot

The main advantage of trading using opposite Monster Beverage and Home Depot positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Monster Beverage 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 Monster Beverage 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.

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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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.