Correlation Between Home Depot and Colgate Palmolive

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

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

Diversification Opportunities for Home Depot and Colgate Palmolive

0.45

Correlation Coefficient

Home Depot  Colgate Palmolive

Very weak diversification

The 3 months correlation between Home and Colgate is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and Colgate Palmolive in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Colgate Palmolive 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 Colgate Palmolive. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Colgate Palmolive has no effect on the direction of Home Depot i.e., Home Depot and Colgate Palmolive go up and down completely randomly.

Pair Corralation between Home Depot and Colgate Palmolive

Allowing for the 90-day total investment horizon Home Depot is expected to generate 1.46 times more return on investment than Colgate Palmolive. However, Home Depot is 1.46 times more volatile than Colgate Palmolive. It trades about 0.04 of its potential returns per unit of risk. Colgate Palmolive is currently generating about 0.04 per unit of risk. If you would invest  27,099  in Home Depot on January 25, 2024 and sell it today you would earn a total of  6,202  from holding Home Depot or generate 22.89% return on investment over 90 days.

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

Home Depot  vs.  Colgate Palmolive

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.

Colgate Palmolive

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Colgate Palmolive are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite quite weak essential indicators, Colgate Palmolive may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Pair Trading with Home Depot and Colgate Palmolive

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

The idea behind Home Depot and Colgate Palmolive 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.