Correlation Between Home Depot and Alcoa Corp

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

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

Diversification Opportunities for Home Depot and Alcoa Corp

-0.37

Correlation Coefficient

Home Depot  Alcoa Corp

Very good diversification

The 3 months correlation between Home and Alcoa is -0.37. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and Alcoa Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Alcoa Corp 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 Alcoa Corp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Alcoa Corp has no effect on the direction of Home Depot i.e., Home Depot and Alcoa Corp go up and down completely randomly.

Pair Corralation between Home Depot and Alcoa Corp

Allowing for the 90-day total investment horizon Home Depot is expected to under-perform the Alcoa Corp. But the stock apears to be less risky and, when comparing its historical volatility, Home Depot is 2.01 times less risky than Alcoa Corp. The stock trades about -0.18 of its potential returns per unit of risk. The Alcoa Corp is currently generating about 0.34 of returns per unit of risk over similar time horizon. If you would invest  2,525  in Alcoa Corp on January 25, 2024 and sell it today you would earn a total of  1,095  from holding Alcoa Corp or generate 43.37% return on investment over 90 days.

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

Home Depot  vs.  Alcoa Corp

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.

Alcoa Corp

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Alcoa Corp are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite somewhat weak basic indicators, Alcoa Corp sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Home Depot and Alcoa Corp

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

The idea behind Home Depot and Alcoa Corp 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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.