Correlation Between Home Depot and Cisco Systems

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

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

Diversification Opportunities for Home Depot and Cisco Systems

-0.3

Correlation Coefficient

Home Depot  Cisco Systems

Very good diversification

The 3 months correlation between Home and Cisco is -0.3. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and Cisco Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cisco Systems 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 Cisco Systems. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cisco Systems has no effect on the direction of Home Depot i.e., Home Depot and Cisco Systems go up and down completely randomly.

Pair Corralation between Home Depot and Cisco Systems

Allowing for the 90-day total investment horizon Home Depot is expected to under-perform the Cisco Systems. In addition to that, Home Depot is 1.36 times more volatile than Cisco Systems. It trades about -0.31 of its total potential returns per unit of risk. Cisco Systems is currently generating about -0.07 per unit of volatility. If you would invest  4,887  in Cisco Systems on January 18, 2024 and sell it today you would lose (95.00) from holding Cisco Systems or give up 1.94% of portfolio value over 90 days.

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

Home Depot  vs.  Cisco Systems

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 newest stock price tumult, may contribute to shorter-term losses for the shareholders.

Cisco Systems

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Cisco Systems has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy fundamental indicators, Cisco Systems is not utilizing all of its potentials. The recent stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Home Depot and Cisco Systems

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

The idea behind Home Depot and Cisco Systems 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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.