Correlation Between Caterpillar and Marathon Oil

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

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

Diversification Opportunities for Caterpillar and Marathon Oil

0.1

Correlation Coefficient

Caterpillar  Marathon Oil

Average diversification

The 3 months correlation between Caterpillar and Marathon is 0.1. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Marathon Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Marathon Oil 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 Marathon Oil. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Marathon Oil has no effect on the direction of Caterpillar i.e., Caterpillar and Marathon Oil go up and down completely randomly.

Pair Corralation between Caterpillar and Marathon Oil

Considering the 90-day investment horizon Caterpillar is expected to generate 5.41 times less return on investment than Marathon Oil. In addition to that, Caterpillar is 1.0 times more volatile than Marathon Oil. It trades about 0.04 of its total potential returns per unit of risk. Marathon Oil is currently generating about 0.21 per unit of volatility. If you would invest  2,636  in Marathon Oil on October 25, 2024 and sell it today you would earn a total of  219.00  from holding Marathon Oil or generate 8.31% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	35.59%
Values	Daily Returns

Caterpillar  vs.  Marathon Oil

Caterpillar

Risk-Adjusted Performance

3 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, Caterpillar is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.

Marathon Oil

Risk-Adjusted Performance

0 of 100

Solid

Over the last 90 days Marathon Oil has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very fragile basic indicators, Marathon Oil displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Caterpillar and Marathon Oil

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

The idea behind Caterpillar and Marathon Oil 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.