Correlation Between Caterpillar and Moderate Duration

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

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

Diversification Opportunities for Caterpillar and Moderate Duration

0.8

Correlation Coefficient

Caterpillar  Moderate Duration

Very poor diversification

The 3 months correlation between Caterpillar and Moderate is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Moderate Duration Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Moderate Duration 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 Moderate Duration. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Moderate Duration has no effect on the direction of Caterpillar i.e., Caterpillar and Moderate Duration go up and down completely randomly.

Pair Corralation between Caterpillar and Moderate Duration

Considering the 90-day investment horizon Caterpillar is expected to generate 7.63 times more return on investment than Moderate Duration. However, Caterpillar is 7.63 times more volatile than Moderate Duration Fund. It trades about 0.08 of its potential returns per unit of risk. Moderate Duration Fund is currently generating about 0.1 per unit of risk. If you would invest  28,578  in Caterpillar on September 17, 2024 and sell it today you would earn a total of  9,473  from holding Caterpillar or generate 33.15% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	86.23%
Values	Daily Returns

Caterpillar  vs.  Moderate Duration Fund

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 unfluctuating basic indicators, Caterpillar may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Moderate Duration

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Moderate Duration Fund has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong fundamental drivers, Moderate Duration is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Caterpillar and Moderate Duration

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

The idea behind Caterpillar and Moderate Duration Fund 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 Competition Analyzer module to analyze and compare many basic indicators for a group of related or unrelated entities.