Correlation Between Home Depot and Advance Auto

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Can any of the company-specific risk be diversified away by investing in both Home Depot and Advance Auto 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 Advance Auto into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Home Depot and Advance Auto Parts, you can compare the effects of market volatilities on Home Depot and Advance Auto 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 Advance Auto. Check out your portfolio center. Please also check ongoing floating volatility patterns of Home Depot and Advance Auto.

Diversification Opportunities for Home Depot and Advance Auto

0.89
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Home Depot and Advance is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and Advance Auto Parts in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Advance Auto Parts 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 Advance Auto. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Advance Auto Parts has no effect on the direction of Home Depot i.e., Home Depot and Advance Auto go up and down completely randomly.

Pair Corralation between Home Depot and Advance Auto

Allowing for the 90-day total investment horizon Home Depot is expected to generate 1.26 times more return on investment than Advance Auto. However, Home Depot is 1.26 times more volatile than Advance Auto Parts. It trades about -0.12 of its potential returns per unit of risk. Advance Auto Parts is currently generating about -0.25 per unit of risk. If you would invest  29,337  in Home Depot on July 3, 2022 and sell it today you would lose (1,743)  from holding Home Depot or give up 5.94% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

Home Depot  vs.  Advance Auto Parts

 Performance (%) 
       Timeline  
Home Depot 
Home Depot Performance
0 of 100
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.

Home Depot Price Channel

Advance Auto Parts 
Advance Performance
0 of 100
Over the last 90 days Advance Auto Parts has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's basic indicators remain very healthy which may send shares a bit higher in November 2022. The recent disarray may also be a sign of long period up-swing for the firm insiders.

Advance Price Channel

Home Depot and Advance Auto Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Home Depot and Advance Auto

The main advantage of trading using opposite Home Depot and Advance Auto positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Home Depot position performs unexpectedly, Advance Auto 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 Advance Auto will offset losses from the drop in Advance Auto's long position.
Home Depot vs. Amazon Inc
The idea behind Home Depot and Advance Auto Parts 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.
Advance Auto vs. Best Buy Company
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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.

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