Correlation Between Caterpillar and Transamerica Small

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

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

Diversification Opportunities for Caterpillar and Transamerica Small

0.79

Correlation Coefficient

Caterpillar  Transamerica Small

Poor diversification

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

Pair Corralation between Caterpillar and Transamerica Small

Considering the 90-day investment horizon Caterpillar is expected to generate 1.64 times more return on investment than Transamerica Small. However, Caterpillar is 1.64 times more volatile than Transamerica Small Cap. It trades about 0.32 of its potential returns per unit of risk. Transamerica Small Cap is currently generating about 0.24 per unit of risk. If you would invest  36,406  in Caterpillar on October 23, 2024 and sell it today you would earn a total of  3,430  from holding Caterpillar or generate 9.42% return on investment over 90 days.

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

Caterpillar  vs.  Transamerica Small Cap

Caterpillar

Risk-Adjusted Performance

2 of 100

Very Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. 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.

Transamerica Small Cap

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Transamerica Small Cap has generated negative risk-adjusted returns adding no value to fund investors. In spite of weak performance in the last few months, the Fund's technical and fundamental indicators remain fairly strong which may send shares a bit higher in February 2025. The current disturbance may also be a sign of long term up-swing for the fund investors.

Pair Trading with Caterpillar and Transamerica Small

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

The idea behind Caterpillar and Transamerica Small Cap 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 Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.