Correlation Between Caterpillar and Alpha Architect

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

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

Diversification Opportunities for Caterpillar and Alpha Architect

0.82

Correlation Coefficient

Caterpillar  Alpha Architect

Very poor diversification

The 3 months correlation between Caterpillar and Alpha is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Alpha Architect Quantitative in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Alpha Architect Quan 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 Alpha Architect. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Alpha Architect Quan has no effect on the direction of Caterpillar i.e., Caterpillar and Alpha Architect go up and down completely randomly.

Pair Corralation between Caterpillar and Alpha Architect

Considering the 90-day investment horizon Caterpillar is expected to under-perform the Alpha Architect. In addition to that, Caterpillar is 1.73 times more volatile than Alpha Architect Quantitative. It trades about -0.08 of its total potential returns per unit of risk. Alpha Architect Quantitative is currently generating about -0.07 per unit of volatility. If you would invest  4,441  in Alpha Architect Quantitative on December 29, 2024 and sell it today you would lose (195.00) from holding Alpha Architect Quantitative or give up 4.39% of portfolio value over 90 days.

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

Caterpillar  vs.  Alpha Architect Quantitative

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 latest unfluctuating performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Alpha Architect Quan

Risk-Adjusted Performance

Very Weak

Over the last 90 days Alpha Architect Quantitative has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, Alpha Architect is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

Pair Trading with Caterpillar and Alpha Architect

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

The idea behind Caterpillar and Alpha Architect Quantitative 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.