Correlation Between Caterpillar and Banco Do

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

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

Diversification Opportunities for Caterpillar and Banco Do

-0.18

Correlation Coefficient

Caterpillar  Banco Do

Good diversification

The 3 months correlation between Caterpillar and Banco is -0.18. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Banco Do Brasil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Banco Do Brasil 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 Banco Do. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Banco Do Brasil has no effect on the direction of Caterpillar i.e., Caterpillar and Banco Do go up and down completely randomly.

Pair Corralation between Caterpillar and Banco Do

Considering the 90-day investment horizon Caterpillar is expected to under-perform the Banco Do. But the stock apears to be less risky and, when comparing its historical volatility, Caterpillar is 1.41 times less risky than Banco Do. The stock trades about -0.17 of its potential returns per unit of risk. The Banco Do Brasil is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  406.00  in Banco Do Brasil on December 1, 2024 and sell it today you would earn a total of  69.00  from holding Banco Do Brasil or generate 17.0% return on investment over 90 days.

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

Caterpillar  vs.  Banco Do Brasil

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.

Banco Do Brasil

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Banco Do Brasil are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Banco Do showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Caterpillar and Banco Do

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

The idea behind Caterpillar and Banco Do Brasil 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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.