Correlation Between Caterpillar and Davis Select

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

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

Diversification Opportunities for Caterpillar and Davis Select

0.76

Correlation Coefficient

Caterpillar  Davis Select

Poor diversification

The 3 months correlation between Caterpillar and Davis is 0.76. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Davis Select Worldwide in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Davis Select Worldwide 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 Davis Select. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Davis Select Worldwide has no effect on the direction of Caterpillar i.e., Caterpillar and Davis Select go up and down completely randomly.

Pair Corralation between Caterpillar and Davis Select

Considering the 90-day investment horizon Caterpillar is expected to generate 1.39 times less return on investment than Davis Select. In addition to that, Caterpillar is 1.31 times more volatile than Davis Select Worldwide. It trades about 0.07 of its total potential returns per unit of risk. Davis Select Worldwide is currently generating about 0.12 per unit of volatility. If you would invest  3,459  in Davis Select Worldwide on September 18, 2024 and sell it today you would earn a total of  380.00  from holding Davis Select Worldwide or generate 10.99% return on investment over 90 days.

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

Caterpillar  vs.  Davis Select Worldwide

Caterpillar

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 5 (%) 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.

Davis Select Worldwide

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Davis Select Worldwide are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of rather conflicting essential indicators, Davis Select may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Caterpillar and Davis Select

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

The idea behind Caterpillar and Davis Select Worldwide 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 Commodity Directory module to find actively traded commodities issued by global exchanges.