Correlation Between Caterpillar and Brown Advisory

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

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

Diversification Opportunities for Caterpillar and Brown Advisory

0.73

Correlation Coefficient

Caterpillar  Brown Advisory

Poor diversification

The 3 months correlation between Caterpillar and Brown is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Brown Advisory Growth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Brown Advisory Growth 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 Brown Advisory. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Brown Advisory Growth has no effect on the direction of Caterpillar i.e., Caterpillar and Brown Advisory go up and down completely randomly.

Pair Corralation between Caterpillar and Brown Advisory

Considering the 90-day investment horizon Caterpillar is expected to generate 1.59 times more return on investment than Brown Advisory. However, Caterpillar is 1.59 times more volatile than Brown Advisory Growth. It trades about 0.08 of its potential returns per unit of risk. Brown Advisory Growth is currently generating about 0.07 per unit of risk. If you would invest  22,712  in Caterpillar on September 3, 2024 and sell it today you would earn a total of  17,899  from holding Caterpillar or generate 78.81% return on investment over 90 days.

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

Caterpillar  vs.  Brown Advisory Growth

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 fragile basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.

Brown Advisory Growth

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Brown Advisory Growth are ranked lower than 12 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak technical and fundamental indicators, Brown Advisory may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Caterpillar and Brown Advisory

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

The idea behind Caterpillar and Brown Advisory Growth 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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.