Correlation Between Caterpillar and ALTRIA

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

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

Diversification Opportunities for Caterpillar and ALTRIA

-0.15

Correlation Coefficient

Caterpillar  ALTRIA

Good diversification

The 3 months correlation between Caterpillar and ALTRIA is -0.15. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and ALTRIA GROUP INC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ALTRIA GROUP 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 ALTRIA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ALTRIA GROUP INC has no effect on the direction of Caterpillar i.e., Caterpillar and ALTRIA go up and down completely randomly.

Pair Corralation between Caterpillar and ALTRIA

Considering the 90-day investment horizon Caterpillar is expected to under-perform the ALTRIA. But the stock apears to be less risky and, when comparing its historical volatility, Caterpillar is 1.09 times less risky than ALTRIA. The stock trades about -0.06 of its potential returns per unit of risk. The ALTRIA GROUP INC is currently generating about -0.03 of returns per unit of risk over similar time horizon. If you would invest  7,236  in ALTRIA GROUP INC on December 26, 2024 and sell it today you would lose (300.00) from holding ALTRIA GROUP INC or give up 4.15% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	98.36%
Values	Daily Returns

Caterpillar  vs.  ALTRIA GROUP INC

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 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.

ALTRIA GROUP INC

Risk-Adjusted Performance

Very Weak

Over the last 90 days ALTRIA GROUP INC has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, ALTRIA is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Caterpillar and ALTRIA

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

The idea behind Caterpillar and ALTRIA GROUP 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 Equity Valuation module to check real value of public entities based on technical and fundamental data.