Correlation Between Caterpillar and Tributary Small/mid

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

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

Diversification Opportunities for Caterpillar and Tributary Small/mid

0.83

Correlation Coefficient

Caterpillar  Tributary Small/mid

Very poor diversification

The 3 months correlation between Caterpillar and Tributary is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Tributary Smallmid Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Tributary Smallmid Cap 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 Tributary Small/mid. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Tributary Smallmid Cap has no effect on the direction of Caterpillar i.e., Caterpillar and Tributary Small/mid go up and down completely randomly.

Pair Corralation between Caterpillar and Tributary Small/mid

Considering the 90-day investment horizon Caterpillar is expected to generate 1.88 times more return on investment than Tributary Small/mid. However, Caterpillar is 1.88 times more volatile than Tributary Smallmid Cap. It trades about 0.16 of its potential returns per unit of risk. Tributary Smallmid Cap is currently generating about 0.14 per unit of risk. If you would invest  33,902  in Caterpillar on September 3, 2024 and sell it today you would earn a total of  6,709  from holding Caterpillar or generate 19.79% return on investment over 90 days.

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

Caterpillar  vs.  Tributary Smallmid Cap

Caterpillar

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.

Tributary Smallmid Cap

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Tributary Smallmid Cap are ranked lower than 10 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Tributary Small/mid may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Caterpillar and Tributary Small/mid

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

The idea behind Caterpillar and Tributary Smallmid Cap 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 Sync Your Broker module to sync your existing holdings, watchlists, positions or portfolios from thousands of online brokerage services, banks, investment account aggregators and robo-advisors..