Correlation Between Home Depot and Cognizant Technology

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

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

Diversification Opportunities for Home Depot and Cognizant Technology

0.45

Correlation Coefficient

Home Depot  Cognizant Technology

Very weak diversification

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

Pair Corralation between Home Depot and Cognizant Technology

Allowing for the 90-day total investment horizon Home Depot is expected to under-perform the Cognizant Technology. In addition to that, Home Depot is 1.32 times more volatile than Cognizant Technology Solutions. It trades about -0.47 of its total potential returns per unit of risk. Cognizant Technology Solutions is currently generating about -0.33 per unit of volatility. If you would invest  7,240  in Cognizant Technology Solutions on January 26, 2024 and sell it today you would lose (488.00) from holding Cognizant Technology Solutions or give up 6.74% of portfolio value over 90 days.

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

Home Depot  vs.  Cognizant Technology Solutions

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.

Cognizant Technology

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Cognizant Technology Solutions has generated negative risk-adjusted returns adding no value to investors with long positions. Despite inconsistent performance in the last few months, the Stock's basic indicators remain fairly strong which may send shares a bit higher in May 2024. The recent confusion may also be a sign of long-lasting up-swing for the firm traders.

Pair Trading with Home Depot and Cognizant Technology

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

The idea behind Home Depot and Cognizant Technology Solutions 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 CEOs Directory module to screen CEOs from public companies around the world.