Correlation Between Caterpillar and First Trust

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

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

Diversification Opportunities for Caterpillar and First Trust

0.64

Correlation Coefficient

Caterpillar  First Trust

Poor diversification

The 3 months correlation between Caterpillar and First is 0.64. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and First Trust NASDAQ in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on First Trust NASDAQ 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 First Trust. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of First Trust NASDAQ has no effect on the direction of Caterpillar i.e., Caterpillar and First Trust go up and down completely randomly.

Pair Corralation between Caterpillar and First Trust

Considering the 90-day investment horizon Caterpillar is expected to under-perform the First Trust. In addition to that, Caterpillar is 1.92 times more volatile than First Trust NASDAQ. It trades about -0.03 of its total potential returns per unit of risk. First Trust NASDAQ is currently generating about 0.08 per unit of volatility. If you would invest  12,285  in First Trust NASDAQ on September 16, 2024 and sell it today you would earn a total of  136.00  from holding First Trust NASDAQ or generate 1.11% return on investment over 90 days.

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

Caterpillar  vs.  First Trust NASDAQ

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.

First Trust NASDAQ

Risk-Adjusted Performance

2 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust NASDAQ are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound forward indicators, First Trust is not utilizing all of its potentials. The recent stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Caterpillar and First Trust

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

The idea behind Caterpillar and First Trust NASDAQ 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .