Correlation Between American Express and Caterpillar

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

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

Diversification Opportunities for American Express and Caterpillar

0.82

Correlation Coefficient

American Express  Caterpillar

Very poor diversification

The 3 months correlation between American and Caterpillar is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding American Express and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and American Express 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 American Express 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 American Express i.e., American Express and Caterpillar go up and down completely randomly.

Pair Corralation between American Express and Caterpillar

Considering the 90-day investment horizon American Express is expected to generate 1.0 times less return on investment than Caterpillar. But when comparing it to its historical volatility, American Express is 1.11 times less risky than Caterpillar. It trades about 0.18 of its potential returns per unit of risk. Caterpillar is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  33,237  in Caterpillar on September 5, 2024 and sell it today you would earn a total of  6,689  from holding Caterpillar or generate 20.13% return on investment over 90 days.

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

American Express  vs.  Caterpillar

American Express

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in American Express are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Even with relatively unfluctuating basic indicators, American Express reported solid returns over the last few months and may actually be approaching a breakup point.

Caterpillar

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with American Express and Caterpillar

The main advantage of trading using opposite American Express and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if American Express 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 American Express 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.

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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.