Correlation Between Caterpillar and AMERICAN

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

By analyzing existing cross correlation between Caterpillar and AMERICAN EXPRESS 405, you can compare the effects of market volatilities on Caterpillar and AMERICAN 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 AMERICAN. Check out your portfolio center. Please also check ongoing floating volatility patterns of Caterpillar and AMERICAN.

Diversification Opportunities for Caterpillar and AMERICAN

-0.42

Correlation Coefficient

Caterpillar  AMERICAN

Very good diversification

The 3 months correlation between Caterpillar and AMERICAN is -0.42. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and AMERICAN EXPRESS 405 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AMERICAN EXPRESS 405 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 AMERICAN. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AMERICAN EXPRESS 405 has no effect on the direction of Caterpillar i.e., Caterpillar and AMERICAN go up and down completely randomly.

Pair Corralation between Caterpillar and AMERICAN

Considering the 90-day investment horizon Caterpillar is expected to generate 1.72 times more return on investment than AMERICAN. However, Caterpillar is 1.72 times more volatile than AMERICAN EXPRESS 405. It trades about 0.09 of its potential returns per unit of risk. AMERICAN EXPRESS 405 is currently generating about 0.08 per unit of risk. If you would invest  34,407  in Caterpillar on September 13, 2024 and sell it today you would earn a total of  3,671  from holding Caterpillar or generate 10.67% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	92.19%
Values	Daily Returns

Caterpillar  vs.  AMERICAN EXPRESS 405

Caterpillar

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively inconsistent basic indicators, Caterpillar may actually be approaching a critical reversion point that can send shares even higher in January 2025.

AMERICAN EXPRESS 405

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in AMERICAN EXPRESS 405 are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, AMERICAN is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Caterpillar and AMERICAN

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

The idea behind Caterpillar and AMERICAN EXPRESS 405 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.

Check out your portfolio center.

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 Forecasting module to use basic forecasting models to generate price predictions and determine price momentum.