Correlation Between Caterpillar and MF Bancorp

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

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

Diversification Opportunities for Caterpillar and MF Bancorp

0.83

Correlation Coefficient

Caterpillar  MF Bancorp

Very poor diversification

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

Pair Corralation between Caterpillar and MF Bancorp

Considering the 90-day investment horizon Caterpillar is expected to under-perform the MF Bancorp. But the stock apears to be less risky and, when comparing its historical volatility, Caterpillar is 2.05 times less risky than MF Bancorp. The stock trades about -0.08 of its potential returns per unit of risk. The MF Bancorp is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  1,943  in MF Bancorp on December 29, 2024 and sell it today you would lose (93.00) from holding MF Bancorp or give up 4.79% of portfolio value over 90 days.

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

Caterpillar  vs.  MF Bancorp

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.

MF Bancorp

Risk-Adjusted Performance

Very Weak

Over the last 90 days MF Bancorp has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable fundamental drivers, MF Bancorp is not utilizing all of its potentials. The newest stock price agitation, may contribute to short-term losses for the retail investors.

Pair Trading with Caterpillar and MF Bancorp

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

The idea behind Caterpillar and MF Bancorp 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.