Correlation Between Caterpillar and FT Vest

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

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

Diversification Opportunities for Caterpillar and FT Vest

0.79

Correlation Coefficient

Caterpillar  FT Vest

Poor diversification

The 3 months correlation between Caterpillar and SDVD is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and FT Vest SMID in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on FT Vest SMID 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 FT Vest. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of FT Vest SMID has no effect on the direction of Caterpillar i.e., Caterpillar and FT Vest go up and down completely randomly.

Pair Corralation between Caterpillar and FT Vest

Considering the 90-day investment horizon Caterpillar is expected to generate 1.62 times more return on investment than FT Vest. However, Caterpillar is 1.62 times more volatile than FT Vest SMID. It trades about 0.31 of its potential returns per unit of risk. FT Vest SMID is currently generating about 0.27 per unit of risk. If you would invest  36,406  in Caterpillar on October 24, 2024 and sell it today you would earn a total of  3,264  from holding Caterpillar or generate 8.97% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	94.74%
Values	Daily Returns

Caterpillar  vs.  FT Vest SMID

Caterpillar

Risk-Adjusted Performance

0 of 100

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.

FT Vest SMID

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in FT Vest SMID are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, FT Vest is not utilizing all of its potentials. The recent stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Caterpillar and FT Vest

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

The idea behind Caterpillar and FT Vest SMID 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.