Correlation Between Caterpillar and China Rare

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

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

Diversification Opportunities for Caterpillar and China Rare

0.15

Correlation Coefficient

Caterpillar  China Rare

Average diversification

The 3 months correlation between Caterpillar and China is 0.15. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and China Rare Earth in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China Rare Earth 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 Rare. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China Rare Earth has no effect on the direction of Caterpillar i.e., Caterpillar and China Rare go up and down completely randomly.

Pair Corralation between Caterpillar and China Rare

Considering the 90-day investment horizon Caterpillar is expected to under-perform the China Rare. But the stock apears to be less risky and, when comparing its historical volatility, Caterpillar is 9.69 times less risky than China Rare. The stock trades about -0.08 of its potential returns per unit of risk. The China Rare Earth is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  6.00  in China Rare Earth on December 30, 2024 and sell it today you would earn a total of  0.00  from holding China Rare Earth or generate 0.0% return on investment over 90 days.

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

Caterpillar  vs.  China Rare Earth

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 latest unfluctuating performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

China Rare Earth

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in China Rare Earth are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, China Rare reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Caterpillar and China Rare

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

The idea behind Caterpillar and China Rare Earth 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.