Correlation Between Caterpillar and American Cannabis

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

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

Diversification Opportunities for Caterpillar and American Cannabis

-0.46

Correlation Coefficient

Caterpillar  American Cannabis

Very good diversification

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

Pair Corralation between Caterpillar and American Cannabis

Considering the 90-day investment horizon Caterpillar is expected to generate 28.27 times less return on investment than American Cannabis. But when comparing it to its historical volatility, Caterpillar is 18.56 times less risky than American Cannabis. It trades about 0.06 of its potential returns per unit of risk. American Cannabis is currently generating about 0.1 of returns per unit of risk over similar time horizon. If you would invest  2.40  in American Cannabis on December 2, 2024 and sell it today you would lose (2.30) from holding American Cannabis or give up 95.83% 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.  American Cannabis

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 weak performance in the last few months, the Stock's basic indicators remain comparatively stable which may send shares a bit higher in April 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

American Cannabis

Risk-Adjusted Performance

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in American Cannabis are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Even with relatively inconsistent primary indicators, American Cannabis revealed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Caterpillar and American Cannabis

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

The idea behind Caterpillar and American Cannabis 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.