Correlation Between Caterpillar and Archer Daniels

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

By analyzing existing cross correlation between Caterpillar and Archer Daniels Midland, you can compare the effects of market volatilities on Caterpillar and Archer Daniels 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 Archer Daniels. Check out your portfolio center. Please also check ongoing floating volatility patterns of Caterpillar and Archer Daniels.

Diversification Opportunities for Caterpillar and Archer Daniels

-0.46

Correlation Coefficient

Caterpillar  Archer Daniels

Very good diversification

The 3 months correlation between Caterpillar and Archer is -0.46. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Archer Daniels Midland in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Archer Daniels Midland 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 Archer Daniels. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Archer Daniels Midland has no effect on the direction of Caterpillar i.e., Caterpillar and Archer Daniels go up and down completely randomly.

Pair Corralation between Caterpillar and Archer Daniels

Considering the 90-day investment horizon Caterpillar is expected to under-perform the Archer Daniels. In addition to that, Caterpillar is 1.06 times more volatile than Archer Daniels Midland. It trades about -0.05 of its total potential returns per unit of risk. Archer Daniels Midland is currently generating about -0.04 per unit of volatility. If you would invest  5,222  in Archer Daniels Midland on September 18, 2024 and sell it today you would lose (53.00) from holding Archer Daniels Midland or give up 1.01% of portfolio value over 90 days.

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

Caterpillar  vs.  Archer Daniels Midland

Caterpillar

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively inconsistent basic indicators, Caterpillar may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Archer Daniels Midland

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Archer Daniels Midland has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unfluctuating performance in the last few months, the Stock's fundamental indicators remain very healthy which may send shares a bit higher in January 2025. The recent disarray may also be a sign of long period up-swing for the firm investors.

Pair Trading with Caterpillar and Archer Daniels

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

The idea behind Caterpillar and Archer Daniels Midland 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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.