Correlation Between Home Depot and American Express

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Can any of the company-specific risk be diversified away by investing in both Home Depot and American Express 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 Express 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 Express, you can compare the effects of market volatilities on Home Depot and American Express 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 Express. Check out your portfolio center. Please also check ongoing floating volatility patterns of Home Depot and American Express.

Diversification Opportunities for Home Depot and American Express

0.88
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Home and American is 0.88. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and American Express in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Express 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 Express. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Express has no effect on the direction of Home Depot i.e., Home Depot and American Express go up and down completely randomly.

Pair Corralation between Home Depot and American Express

Allowing for the 90-day total investment horizon Home Depot is expected to generate 1.05 times less return on investment than American Express. But when comparing it to its historical volatility, Home Depot is 1.14 times less risky than American Express. It trades about 0.04 of its potential returns per unit of risk. American Express is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  17,311  in American Express on December 30, 2023 and sell it today you would earn a total of  5,458  from holding American Express or generate 31.53% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

Home Depot  vs.  American Express

 Performance 
       Timeline  
Home Depot 

Risk-Adjusted Performance

12 of 100

 
Low
 
High
Good
Compared to the overall equity markets, risk-adjusted returns on investments in Home Depot are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile fundamental indicators, Home Depot may actually be approaching a critical reversion point that can send shares even higher in April 2024.
American Express 

Risk-Adjusted Performance

19 of 100

 
Low
 
High
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in American Express are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. Even with relatively unfluctuating basic indicators, American Express reported solid returns over the last few months and may actually be approaching a breakup point.

Home Depot and American Express Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Home Depot and American Express

The main advantage of trading using opposite Home Depot and American Express positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Home Depot position performs unexpectedly, American Express 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 Express will offset losses from the drop in American Express' long position.
The idea behind Home Depot and American Express 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 Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.

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