Correlation Between Nestle SA and Home Depot
Can any of the company-specific risk be diversified away by investing in both Nestle SA and Home Depot 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 Nestle SA and Home Depot into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Nestle SA and Home Depot, you can compare the effects of market volatilities on Nestle SA and Home Depot 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 Nestle SA with a short position of Home Depot. Check out your portfolio center. Please also check ongoing floating volatility patterns of Nestle SA and Home Depot.
Diversification Opportunities for Nestle SA and Home Depot
-0.4 | Correlation Coefficient |
Very good diversification
The 3 months correlation between Nestle and Home is -0.4. Overlapping area represents the amount of risk that can be diversified away by holding Nestle SA and Home Depot in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Home Depot and Nestle SA 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 Nestle SA are associated (or correlated) with Home Depot. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Home Depot has no effect on the direction of Nestle SA i.e., Nestle SA and Home Depot go up and down completely randomly.
Pair Corralation between Nestle SA and Home Depot
Assuming the 90 days horizon Nestle SA is expected to under-perform the Home Depot. But the pink sheet apears to be less risky and, when comparing its historical volatility, Nestle SA is 1.15 times less risky than Home Depot. The pink sheet trades about -0.05 of its potential returns per unit of risk. The Home Depot is currently generating about 0.12 of returns per unit of risk over similar time horizon. If you would invest 28,316 in Home Depot on January 17, 2024 and sell it today you would earn a total of 5,477 from holding Home Depot or generate 19.34% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 100.0% |
| Values | Daily Returns |
Nestle SA vs. Home Depot
Performance |
| Timeline |
| Nestle SA |
| Home Depot |
Nestle SA and Home Depot Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Nestle SA and Home Depot
The main advantage of trading using opposite Nestle SA and Home Depot positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Nestle SA position performs unexpectedly, Home Depot 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 Home Depot will offset losses from the drop in Home Depot's long position.The idea behind Nestle SA and Home Depot 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.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 the Fundamentals Comparison module to compare fundamentals across multiple equities to find investing opportunities.
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