Correlation Between Caterpillar and All American

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

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

Diversification Opportunities for Caterpillar and All American

0.36

Correlation Coefficient

Caterpillar  All American

Weak diversification

The 3 months correlation between Caterpillar and All is 0.36. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and All American Gld in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on All American Gld and Caterpillar 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 Caterpillar are associated (or correlated) with All American. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of All American Gld has no effect on the direction of Caterpillar i.e., Caterpillar and All American go up and down completely randomly.

Pair Corralation between Caterpillar and All American

Considering the 90-day investment horizon Caterpillar is expected to generate 0.15 times more return on investment than All American. However, Caterpillar is 6.52 times less risky than All American. It trades about -0.05 of its potential returns per unit of risk. All American Gld is currently generating about -0.02 per unit of risk. If you would invest  36,168  in Caterpillar on December 29, 2024 and sell it today you would lose (2,238) from holding Caterpillar or give up 6.19% of portfolio value over 90 days.

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

Caterpillar  vs.  All American Gld

Caterpillar

Risk-Adjusted Performance

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 comparatively stable basic indicators, Caterpillar is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.

All American Gld

Risk-Adjusted Performance

Very Weak

Over the last 90 days All American Gld has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of weak performance in the last few months, the Stock's technical and fundamental indicators remain rather sound which may send shares a bit higher in April 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with Caterpillar and All American

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

The idea behind Caterpillar and All American Gld 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.