Correlation Between Caterpillar and Micropac Industries

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

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

Diversification Opportunities for Caterpillar and Micropac Industries

0.59

Correlation Coefficient

Caterpillar  Micropac Industries

Very weak diversification

The 3 months correlation between Caterpillar and Micropac is 0.59. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Micropac Industries in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Micropac Industries 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 Micropac Industries. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Micropac Industries has no effect on the direction of Caterpillar i.e., Caterpillar and Micropac Industries go up and down completely randomly.

Pair Corralation between Caterpillar and Micropac Industries

Considering the 90-day investment horizon Caterpillar is expected to under-perform the Micropac Industries. But the stock apears to be less risky and, when comparing its historical volatility, Caterpillar is 2.15 times less risky than Micropac Industries. The stock trades about -0.02 of its potential returns per unit of risk. The Micropac Industries is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  1,625  in Micropac Industries on September 13, 2024 and sell it today you would earn a total of  364.00  from holding Micropac Industries or generate 22.4% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	97.67%
Values	Daily Returns

Caterpillar  vs.  Micropac Industries

Caterpillar

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively inconsistent basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.

Micropac Industries

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Micropac Industries are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady basic indicators, Micropac Industries exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Caterpillar and Micropac Industries

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

The idea behind Caterpillar and Micropac Industries 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 Investing Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.