Correlation Between Caterpillar and Direxion Daily

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

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

Diversification Opportunities for Caterpillar and Direxion Daily

0.67

Correlation Coefficient

Caterpillar  Direxion Daily

Poor diversification

The 3 months correlation between Caterpillar and Direxion is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Direxion Daily Healthcare in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Direxion Daily Healthcare 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 Direxion Daily. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Direxion Daily Healthcare has no effect on the direction of Caterpillar i.e., Caterpillar and Direxion Daily go up and down completely randomly.

Pair Corralation between Caterpillar and Direxion Daily

Considering the 90-day investment horizon Caterpillar is expected to generate 1.28 times less return on investment than Direxion Daily. But when comparing it to its historical volatility, Caterpillar is 1.58 times less risky than Direxion Daily. It trades about 0.27 of its potential returns per unit of risk. Direxion Daily Healthcare is currently generating about 0.22 of returns per unit of risk over similar time horizon. If you would invest  8,876  in Direxion Daily Healthcare on October 20, 2024 and sell it today you would earn a total of  794.00  from holding Direxion Daily Healthcare or generate 8.95% return on investment over 90 days.

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

Caterpillar  vs.  Direxion Daily Healthcare

Caterpillar

Risk-Adjusted Performance

0 of 100

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 comparatively stable basic indicators, Caterpillar is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.

Direxion Daily Healthcare

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Direxion Daily Healthcare has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of conflicting performance in the last few months, the Etf's basic indicators remain rather sound which may send shares a bit higher in February 2025. The latest tumult may also be a sign of longer-term up-swing for the fund shareholders.

Pair Trading with Caterpillar and Direxion Daily

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

The idea behind Caterpillar and Direxion Daily Healthcare 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.