Correlation Between NMI Holdings and Caterpillar

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

By analyzing existing cross correlation between NMI Holdings and Caterpillar, you can compare the effects of market volatilities on NMI Holdings and Caterpillar 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 NMI Holdings with a short position of Caterpillar. Check out your portfolio center. Please also check ongoing floating volatility patterns of NMI Holdings and Caterpillar.

Diversification Opportunities for NMI Holdings and Caterpillar

0.45

Correlation Coefficient

NMI Holdings  Caterpillar

Very weak diversification

The 3 months correlation between NMI and Caterpillar is 0.45. Overlapping area represents the amount of risk that can be diversified away by holding NMI Holdings and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and NMI Holdings 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 NMI Holdings are associated (or correlated) with Caterpillar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Caterpillar has no effect on the direction of NMI Holdings i.e., NMI Holdings and Caterpillar go up and down completely randomly.

Pair Corralation between NMI Holdings and Caterpillar

Assuming the 90 days horizon NMI Holdings is expected to under-perform the Caterpillar. In addition to that, NMI Holdings is 1.01 times more volatile than Caterpillar. It trades about -0.04 of its total potential returns per unit of risk. Caterpillar is currently generating about 0.0 per unit of volatility. If you would invest  35,810  in Caterpillar on October 4, 2024 and sell it today you would lose (410.00) from holding Caterpillar or give up 1.14% of portfolio value over 90 days.

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

NMI Holdings  vs.  Caterpillar

NMI Holdings

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days NMI Holdings has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable basic indicators, NMI Holdings is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Caterpillar

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Caterpillar has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Caterpillar is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with NMI Holdings and Caterpillar

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

The idea behind NMI Holdings and Caterpillar 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.