Correlation Between Caterpillar and South32

Can any of the company-specific risk be diversified away by investing in both Caterpillar and South32 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 South32 into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Caterpillar and South32 Limited, you can compare the effects of market volatilities on Caterpillar and South32 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 South32. Check out your portfolio center. Please also check ongoing floating volatility patterns of Caterpillar and South32.

Diversification Opportunities for Caterpillar and South32

-0.5

Correlation Coefficient

Caterpillar  South32

Very good diversification

The 3 months correlation between Caterpillar and South32 is -0.5. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and South32 Limited in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on South32 Limited 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 South32. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of South32 Limited has no effect on the direction of Caterpillar i.e., Caterpillar and South32 go up and down completely randomly.

Pair Corralation between Caterpillar and South32

Considering the 90-day investment horizon Caterpillar is expected to under-perform the South32. But the stock apears to be less risky and, when comparing its historical volatility, Caterpillar is 1.53 times less risky than South32. The stock trades about -0.08 of its potential returns per unit of risk. The South32 Limited is currently generating about -0.04 of returns per unit of risk over similar time horizon. If you would invest  217.00  in South32 Limited on December 30, 2024 and sell it today you would lose (17.00) from holding South32 Limited or give up 7.83% of portfolio value over 90 days.

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

Caterpillar  vs.  South32 Limited

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.

South32 Limited

Risk-Adjusted Performance

Very Weak

Over the last 90 days South32 Limited has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable essential indicators, South32 is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Caterpillar and South32

The main advantage of trading using opposite Caterpillar and South32 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar position performs unexpectedly, South32 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 South32 will offset losses from the drop in South32's long position.

The idea behind Caterpillar and South32 Limited 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 Technical Analysis module to check basic technical indicators and analysis based on most latest market data.