Correlation Between Home Depot and Deswell Industries

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

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

Diversification Opportunities for Home Depot and Deswell Industries

-0.5

Correlation Coefficient

Home Depot  Deswell Industries

Very good diversification

The 3 months correlation between Home and Deswell is -0.5. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and Deswell Industries in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Deswell Industries 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 Deswell Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Deswell Industries has no effect on the direction of Home Depot i.e., Home Depot and Deswell Industries go up and down completely randomly.

Pair Corralation between Home Depot and Deswell Industries

Allowing for the 90-day total investment horizon Home Depot is expected to generate 0.64 times more return on investment than Deswell Industries. However, Home Depot is 1.56 times less risky than Deswell Industries. It trades about 0.03 of its potential returns per unit of risk. Deswell Industries is currently generating about -0.01 per unit of risk. If you would invest  28,389  in Home Depot on January 25, 2024 and sell it today you would earn a total of  5,511  from holding Home Depot or generate 19.41% return on investment over 90 days.

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

Home Depot  vs.  Deswell Industries

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.

Deswell Industries

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Deswell Industries has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest unsteady performance, the Stock's basic indicators remain persistent and the latest mess on Wall Street may also be a sign of long-standing gains for the company institutional investors.

Pair Trading with Home Depot and Deswell Industries

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

The idea behind Home Depot and Deswell Industries 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 Portfolio Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.