Correlation Between Caterpillar and 00108WAF7

Can any of the company-specific risk be diversified away by investing in both Caterpillar and 00108WAF7 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 00108WAF7 into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Caterpillar and AEP TEX INC, you can compare the effects of market volatilities on Caterpillar and 00108WAF7 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 00108WAF7. Check out your portfolio center. Please also check ongoing floating volatility patterns of Caterpillar and 00108WAF7.

Diversification Opportunities for Caterpillar and 00108WAF7

-0.1

Correlation Coefficient

Caterpillar  00108WAF7

Good diversification

The 3 months correlation between Caterpillar and 00108WAF7 is -0.1. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and AEP TEX INC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AEP TEX INC 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 00108WAF7. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AEP TEX INC has no effect on the direction of Caterpillar i.e., Caterpillar and 00108WAF7 go up and down completely randomly.

Pair Corralation between Caterpillar and 00108WAF7

Considering the 90-day investment horizon Caterpillar is expected to generate 64.6 times less return on investment than 00108WAF7. But when comparing it to its historical volatility, Caterpillar is 78.86 times less risky than 00108WAF7. It trades about 0.16 of its potential returns per unit of risk. AEP TEX INC is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  7,607  in AEP TEX INC on September 3, 2024 and sell it today you would earn a total of  614.00  from holding AEP TEX INC or generate 8.07% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	73.44%
Values	Daily Returns

Caterpillar  vs.  AEP TEX INC

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.

AEP TEX INC

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in AEP TEX INC are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite somewhat fragile basic indicators, 00108WAF7 sustained solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Caterpillar and 00108WAF7

The main advantage of trading using opposite Caterpillar and 00108WAF7 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar position performs unexpectedly, 00108WAF7 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 00108WAF7 will offset losses from the drop in 00108WAF7's long position.

The idea behind Caterpillar and AEP TEX INC 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 Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.