Correlation Between Home Depot and Target

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

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

Diversification Opportunities for Home Depot and Target

0.28

Correlation Coefficient

Home Depot  Target

Modest diversification

The 3 months correlation between Home and Target is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and Target in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Target 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 Target. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Target has no effect on the direction of Home Depot i.e., Home Depot and Target go up and down completely randomly.

Pair Corralation between Home Depot and Target

Allowing for the 90-day total investment horizon Home Depot is expected to under-perform the Target. In addition to that, Home Depot is 1.19 times more volatile than Target. It trades about -0.49 of its total potential returns per unit of risk. Target is currently generating about -0.16 per unit of volatility. If you would invest  17,266  in Target on January 25, 2024 and sell it today you would lose (664.00) from holding Target or give up 3.85% of portfolio value over 90 days.

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

Home Depot  vs.  Target

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.

Target

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Target are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain technical and fundamental indicators, Target unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Home Depot and Target

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

The idea behind Home Depot and Target 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 ETF Categories module to list of ETF categories grouped based on various criteria, such as the investment strategy or type of investments.