Correlation Between Caterpillar and Overlay Shares

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

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

Diversification Opportunities for Caterpillar and Overlay Shares

-0.48

Correlation Coefficient

Caterpillar  Overlay Shares

Very good diversification

The 3 months correlation between Caterpillar and Overlay is -0.48. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Overlay Shares Core in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Overlay Shares Core 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 Overlay Shares. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Overlay Shares Core has no effect on the direction of Caterpillar i.e., Caterpillar and Overlay Shares go up and down completely randomly.

Pair Corralation between Caterpillar and Overlay Shares

Considering the 90-day investment horizon Caterpillar is expected to under-perform the Overlay Shares. In addition to that, Caterpillar is 4.47 times more volatile than Overlay Shares Core. It trades about -0.05 of its total potential returns per unit of risk. Overlay Shares Core is currently generating about 0.07 per unit of volatility. If you would invest  2,021  in Overlay Shares Core on December 27, 2024 and sell it today you would earn a total of  30.00  from holding Overlay Shares Core or generate 1.48% return on investment over 90 days.

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

Caterpillar  vs.  Overlay Shares Core

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 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.

Overlay Shares Core

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Overlay Shares Core are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, Overlay Shares is not utilizing all of its potentials. The recent stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Caterpillar and Overlay Shares

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

The idea behind Caterpillar and Overlay Shares Core 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 Performance Analysis module to check effects of mean-variance optimization against your current asset allocation.