Correlation Between Caterpillar and PHI

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

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

Diversification Opportunities for Caterpillar and PHI

0.28

Correlation Coefficient

Caterpillar  PHI

Modest diversification

The 3 months correlation between Caterpillar and PHI is 0.28. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and PHI Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PHI Group 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 PHI. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PHI Group has no effect on the direction of Caterpillar i.e., Caterpillar and PHI go up and down completely randomly.

Pair Corralation between Caterpillar and PHI

Considering the 90-day investment horizon Caterpillar is expected to under-perform the PHI. But the stock apears to be less risky and, when comparing its historical volatility, Caterpillar is 17.95 times less risky than PHI. The stock trades about -0.05 of its potential returns per unit of risk. The PHI Group is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  0.05  in PHI Group on December 29, 2024 and sell it today you would lose (0.03) from holding PHI Group or give up 60.0% 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.  PHI Group

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.

PHI Group

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in PHI Group are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite quite conflicting forward indicators, PHI disclosed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Caterpillar and PHI

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

The idea behind Caterpillar and PHI Group 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.