Correlation Between Home Depot and Cisco Systems

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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

0.45
  Correlation Coefficient

Very weak diversification

The 3 months correlation between Home Depot and Cisco is 0.45. 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 generate 1.07 times less return on investment than Cisco Systems. But when comparing it to its historical volatility, Home Depot is 1.02 times less risky than Cisco Systems. It trades about 0.27 of its potential returns per unit of risk. Cisco Systems is currently generating about 0.28 of returns per unit of risk over similar time horizon. If you would invest  4,307  in Cisco Systems on May 16, 2022 and sell it today you would earn a total of  354.00  from holding Cisco Systems or generate 8.22% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthWeak
Accuracy100.0%
ValuesDaily Returns

Home Depot  vs.  Cisco Systems

 Performance (%) 
       Timeline  
Home Depot 
Home Depot Performance
5 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Home Depot are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of rather conflicting fundamental indicators, Home Depot may actually be approaching a critical reversion point that can send shares even higher in September 2022.

Home Depot Price Channel

Cisco Systems 
Cisco Performance
0 of 100
Over the last 90 days Cisco Systems has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent fundamental indicators, Cisco Systems is not utilizing all of its potentials. The new stock price mess, may contribute to short-term losses for the institutional investors.

Cisco Price Channel

Home Depot and Cisco Systems Volatility Contrast

   Predicted Return Density   
       Returns  

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.

Cisco Systems

Pair trading matchups for Cisco Systems

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 ETF Directory module to find actively traded Exchange Traded Funds (ETF) from around the world.

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