Correlation Between Home Depot and Caribbean Utilities

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

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

Diversification Opportunities for Home Depot and Caribbean Utilities

-0.76

Correlation Coefficient

Home Depot  Caribbean Utilities

Pay attention - limited upside

The 3 months correlation between Home and Caribbean is -0.76. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and Caribbean Utilities in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caribbean Utilities 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 Caribbean Utilities. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Caribbean Utilities has no effect on the direction of Home Depot i.e., Home Depot and Caribbean Utilities go up and down completely randomly.

Pair Corralation between Home Depot and Caribbean Utilities

Allowing for the 90-day total investment horizon Home Depot is expected to generate 1.7 times less return on investment than Caribbean Utilities. But when comparing it to its historical volatility, Home Depot is 2.25 times less risky than Caribbean Utilities. It trades about 0.02 of its potential returns per unit of risk. Caribbean Utilities is currently generating about 0.02 of returns per unit of risk over similar time horizon. If you would invest  1,379  in Caribbean Utilities on February 24, 2024 and sell it today you would earn a total of  14.00  from holding Caribbean Utilities or generate 1.02% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	87.1%
Values	Daily Returns

Home Depot  vs.  Caribbean Utilities

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 latest weak performance, the Stock's fundamental indicators remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Caribbean Utilities

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Caribbean Utilities are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Caribbean Utilities reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Home Depot and Caribbean Utilities

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

The idea behind Home Depot and Caribbean Utilities 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.