Correlation Between Caterpillar and China Health

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

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

Diversification Opportunities for Caterpillar and China Health

-0.72

Correlation Coefficient

Caterpillar  China Health

Pay attention - limited upside

The 3 months correlation between Caterpillar and China is -0.72. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and China Health Management in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Health Management 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 China Health. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Health Management has no effect on the direction of Caterpillar i.e., Caterpillar and China Health go up and down completely randomly.

Pair Corralation between Caterpillar and China Health

Considering the 90-day investment horizon Caterpillar is expected to generate 0.15 times more return on investment than China Health. However, Caterpillar is 6.48 times less risky than China Health. It trades about -0.03 of its potential returns per unit of risk. China Health Management is currently generating about -0.14 per unit of risk. If you would invest  38,407  in Caterpillar on September 16, 2024 and sell it today you would lose (356.00) from holding Caterpillar or give up 0.93% of portfolio value over 90 days.

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

Caterpillar  vs.  China Health Management

Caterpillar

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively inconsistent basic indicators, Caterpillar may actually be approaching a critical reversion point that can send shares even higher in January 2025.

China Health Management

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days China Health Management has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of unsteady performance in the last few months, the Stock's technical indicators remain rather sound which may send shares a bit higher in January 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Pair Trading with Caterpillar and China Health

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

The idea behind Caterpillar and China Health Management 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.