Correlation Between Caterpillar and NVIDIA

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

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

Diversification Opportunities for Caterpillar and NVIDIA

0.32

Correlation Coefficient

Caterpillar  NVIDIA

Weak diversification

The 3 months correlation between Caterpillar and NVIDIA is 0.32. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and NVIDIA in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NVIDIA 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 NVIDIA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NVIDIA has no effect on the direction of Caterpillar i.e., Caterpillar and NVIDIA go up and down completely randomly.

Pair Corralation between Caterpillar and NVIDIA

Considering the 90-day investment horizon Caterpillar is expected to under-perform the NVIDIA. But the stock apears to be less risky and, when comparing its historical volatility, Caterpillar is 2.3 times less risky than NVIDIA. The stock trades about -0.18 of its potential returns per unit of risk. The NVIDIA is currently generating about -0.01 of returns per unit of risk over similar time horizon. If you would invest  13,824  in NVIDIA on November 28, 2024 and sell it today you would lose (796.00) from holding NVIDIA or give up 5.76% of portfolio value over 90 days.

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

Caterpillar  vs.  NVIDIA

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 weak performance in the last few months, the Stock's basic indicators remain comparatively stable which may send shares a bit higher in March 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

NVIDIA

Risk-Adjusted Performance

Very Weak

Over the last 90 days NVIDIA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong fundamental indicators, NVIDIA is not utilizing all of its potentials. The latest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Caterpillar and NVIDIA

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

The idea behind Caterpillar and NVIDIA 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.