Correlation Between Home Depot and American Airlines

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

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

Diversification Opportunities for Home Depot and American Airlines

0.52

Correlation Coefficient

Home Depot  American Airlines

Very weak diversification

The 3 months correlation between Home and American is 0.52. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and American Airlines Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Airlines 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 American Airlines. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Airlines has no effect on the direction of Home Depot i.e., Home Depot and American Airlines go up and down completely randomly.

Pair Corralation between Home Depot and American Airlines

Allowing for the 90-day total investment horizon Home Depot is expected to under-perform the American Airlines. But the stock apears to be less risky and, when comparing its historical volatility, Home Depot is 2.08 times less risky than American Airlines. The stock trades about -0.49 of its potential returns per unit of risk. The American Airlines Group is currently generating about -0.1 of returns per unit of risk over similar time horizon. If you would invest  1,492  in American Airlines Group on January 25, 2024 and sell it today you would lose (98.00) from holding American Airlines Group or give up 6.57% of portfolio value over 90 days.

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

Home Depot  vs.  American Airlines Group

Home Depot

Risk-Adjusted Performance

0 of 100

Very Weak

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

American Airlines

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days American Airlines Group has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, American Airlines is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with Home Depot and American Airlines

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

The idea behind Home Depot and American Airlines Group 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 Earnings Calls module to check upcoming earnings announcements updated hourly across public exchanges.