Correlation Between Caterpillar and CAPITAL

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

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

Diversification Opportunities for Caterpillar and CAPITAL

-0.33

Correlation Coefficient

Caterpillar  CAPITAL

Very good diversification

The 3 months correlation between Caterpillar and CAPITAL is -0.33. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and CAPITAL ONE FINL in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on CAPITAL ONE FINL 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 CAPITAL. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of CAPITAL ONE FINL has no effect on the direction of Caterpillar i.e., Caterpillar and CAPITAL go up and down completely randomly.

Pair Corralation between Caterpillar and CAPITAL

Considering the 90-day investment horizon Caterpillar is expected to generate 15.07 times more return on investment than CAPITAL. However, Caterpillar is 15.07 times more volatile than CAPITAL ONE FINL. It trades about 0.16 of its potential returns per unit of risk. CAPITAL ONE FINL is currently generating about -0.02 per unit of risk. If you would invest  33,554  in Caterpillar on September 4, 2024 and sell it today you would earn a total of  6,697  from holding Caterpillar or generate 19.96% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	96.88%
Values	Daily Returns

Caterpillar  vs.  CAPITAL ONE FINL

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 unfluctuating basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.

CAPITAL ONE FINL

Risk-Adjusted Performance

0 of 100

Very Weak

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

Pair Trading with Caterpillar and CAPITAL

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

The idea behind Caterpillar and CAPITAL ONE FINL 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.