Correlation Between Five Star and Home Depot

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Can any of the company-specific risk be diversified away by investing in both Five Star 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 Five Star and Home Depot into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Five Star Bancorp and Home Depot, you can compare the effects of market volatilities on Five Star 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 Five Star with a short position of Home Depot. Check out your portfolio center. Please also check ongoing floating volatility patterns of Five Star and Home Depot.

Diversification Opportunities for Five Star and Home Depot

-0.65
  Correlation Coefficient

Excellent diversification

The 3 months correlation between Five and Home is -0.65. Overlapping area represents the amount of risk that can be diversified away by holding Five Star Bancorp and Home Depot in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Home Depot and Five Star 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 Five Star Bancorp 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 Five Star i.e., Five Star and Home Depot go up and down completely randomly.

Pair Corralation between Five Star and Home Depot

Given the investment horizon of 90 days Five Star Bancorp is expected to under-perform the Home Depot. In addition to that, Five Star is 1.77 times more volatile than Home Depot. It trades about -0.06 of its total potential returns per unit of risk. Home Depot is currently generating about 0.09 per unit of volatility. If you would invest  37,537  in Home Depot on December 30, 2023 and sell it today you would earn a total of  823.00  from holding Home Depot or generate 2.19% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthWeak
Accuracy100.0%
ValuesDaily Returns

Five Star Bancorp  vs.  Home Depot

 Performance 
       Timeline  
Five Star Bancorp 

Risk-Adjusted Performance

0 of 100

 
Low
 
High
Very Weak
Over the last 90 days Five Star Bancorp has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's fundamental drivers remain rather sound which may send shares a bit higher in April 2024. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.
Home Depot 

Risk-Adjusted Performance

12 of 100

 
Low
 
High
Good
Compared to the overall equity markets, risk-adjusted returns on investments in Home Depot are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile fundamental indicators, Home Depot may actually be approaching a critical reversion point that can send shares even higher in April 2024.

Five Star and Home Depot Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Five Star and Home Depot

The main advantage of trading using opposite Five Star and Home Depot positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Five Star 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 Five Star Bancorp and 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.

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