Correlation Between Caterpillar and Mid Capitalization

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

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

Diversification Opportunities for Caterpillar and Mid Capitalization

0.82

Correlation Coefficient

Caterpillar  Mid Capitalization

Very poor diversification

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

Pair Corralation between Caterpillar and Mid Capitalization

Considering the 90-day investment horizon Caterpillar is expected to generate 1.88 times more return on investment than Mid Capitalization. However, Caterpillar is 1.88 times more volatile than Mid Capitalization Portfolio. It trades about 0.16 of its potential returns per unit of risk. Mid Capitalization Portfolio is currently generating about 0.26 per unit of risk. If you would invest  33,902  in Caterpillar on September 3, 2024 and sell it today you would earn a total of  6,709  from holding Caterpillar or generate 19.79% return on investment over 90 days.

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

Caterpillar  vs.  Mid Capitalization Portfolio

Caterpillar

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.

Mid Capitalization

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Mid Capitalization Portfolio are ranked lower than 20 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly weak fundamental indicators, Mid Capitalization showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Caterpillar and Mid Capitalization

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

The idea behind Caterpillar and Mid Capitalization Portfolio 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 Positions Ratings module to determine portfolio positions ratings based on digital equity recommendations. Macroaxis instant position ratings are based on combination of fundamental analysis and risk-adjusted market performance.