Correlation Between Home Depot and Toyota

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

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

Diversification Opportunities for Home Depot and Toyota

-0.57

Correlation Coefficient

Home Depot  Toyota

Excellent diversification

The 3 months correlation between Home and Toyota is -0.57. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and Toyota Motor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Toyota Motor 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 Toyota. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Toyota Motor has no effect on the direction of Home Depot i.e., Home Depot and Toyota go up and down completely randomly.

Pair Corralation between Home Depot and Toyota

Allowing for the 90-day total investment horizon Home Depot is expected to generate 0.85 times more return on investment than Toyota. However, Home Depot is 1.17 times less risky than Toyota. It trades about 0.05 of its potential returns per unit of risk. Toyota Motor is currently generating about 0.04 per unit of risk. If you would invest  30,930  in Home Depot on August 21, 2024 and sell it today you would earn a total of  10,114  from holding Home Depot or generate 32.7% 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.  Toyota Motor

Home Depot

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Home Depot are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather unfluctuating fundamental indicators, Home Depot may actually be approaching a critical reversion point that can send shares even higher in December 2024.

Toyota Motor

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Toyota Motor has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy primary indicators, Toyota is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Home Depot and Toyota

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

The idea behind Home Depot and Toyota Motor 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 Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..