Correlation Between Morgan Stanley and Home Depot

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

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

Diversification Opportunities for Morgan Stanley and Home Depot

0.84

Correlation Coefficient

Morgan Stanley  Home Depot

Very poor diversification

The 3 months correlation between Morgan and Home is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Morgan Stanley and The Home Depot in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Home Depot and Morgan Stanley 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 Morgan Stanley 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 Morgan Stanley i.e., Morgan Stanley and Home Depot go up and down completely randomly.

Pair Corralation between Morgan Stanley and Home Depot

Assuming the 90 days trading horizon Morgan Stanley is expected to generate 1.71 times more return on investment than Home Depot. However, Morgan Stanley is 1.71 times more volatile than The Home Depot. It trades about 0.21 of its potential returns per unit of risk. The Home Depot is currently generating about 0.14 per unit of risk. If you would invest  11,297  in Morgan Stanley on September 26, 2024 and sell it today you would earn a total of  4,109  from holding Morgan Stanley or generate 36.37% return on investment over 90 days.

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

Morgan Stanley  vs.  The Home Depot

Morgan Stanley

Risk-Adjusted Performance

16 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Morgan Stanley are ranked lower than 16 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak fundamental drivers, Morgan Stanley sustained solid returns over the last few months and may actually be approaching a breakup point.

Home Depot

Risk-Adjusted Performance

11 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in The Home Depot are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak primary indicators, Home Depot sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Morgan Stanley and Home Depot

The main advantage of trading using opposite Morgan Stanley and Home Depot positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Morgan Stanley 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 Morgan Stanley 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.