Correlation Between Caterpillar and BZAM

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

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

Diversification Opportunities for Caterpillar and BZAM

-0.68

Correlation Coefficient

Caterpillar  BZAM

Excellent diversification

The 3 months correlation between Caterpillar and BZAM is -0.68. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and BZAM in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on BZAM 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 BZAM. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of BZAM has no effect on the direction of Caterpillar i.e., Caterpillar and BZAM go up and down completely randomly.

Pair Corralation between Caterpillar and BZAM

Considering the 90-day investment horizon Caterpillar is expected to generate 97.07 times less return on investment than BZAM. But when comparing it to its historical volatility, Caterpillar is 96.11 times less risky than BZAM. It trades about 0.12 of its potential returns per unit of risk. BZAM is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  2.00  in BZAM on September 12, 2024 and sell it today you would lose (2.00) from holding BZAM or give up 100.0% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	98.41%
Values	Daily Returns

Caterpillar  vs.  BZAM

Caterpillar

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.

BZAM

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in BZAM are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak primary indicators, BZAM reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Caterpillar and BZAM

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

The idea behind Caterpillar and BZAM 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.

Check out your portfolio center.

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 Volatility module to check portfolio volatility and analyze historical return density to properly model market risk.