Can any of the company-specific risk be diversified away by investing in both Home Depot and AMGEN 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 AMGEN into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Home Depot and AMGEN INC, you can compare the effects of market volatilities on Home Depot and AMGEN 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 AMGEN. Check out your portfolio center. Please also check ongoing floating volatility patterns of Home Depot and AMGEN.
Diversification Opportunities for Home Depot and AMGEN
The 3 months correlation between Home and AMGEN is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and AMGEN INC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AMGEN INC 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 AMGEN. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AMGEN INC has no effect on the direction of Home Depot i.e., Home Depot and AMGEN go up and down completely randomly.
Allowing for the 90-day total investment horizon Home Depot is expected to under-perform the AMGEN. In addition to that, Home Depot is 1.75 times more volatile than AMGEN INC. It trades about -0.12 of its total potential returns per unit of risk. AMGEN INC is currently generating about -0.17 per unit of volatility. If you would invest 8,006 in AMGEN INC on March 6, 2024 and sell it today you would lose (216.00) from holding AMGEN INC or give up 2.7% of portfolio value over 90 days.
Over the last 90 days Home Depot has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unfluctuating performance in the last few months, the Stock's fundamental indicators remain rather sound which may send shares a bit higher in July 2024. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.
Over the last 90 days AMGEN INC has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, AMGEN is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.