Correlation Between Caterpillar and NISOURCE

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

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

Diversification Opportunities for Caterpillar and NISOURCE

-0.2

Correlation Coefficient

Caterpillar  NISOURCE

Good diversification

The 3 months correlation between Caterpillar and NISOURCE is -0.2. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and NISOURCE INC in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on NISOURCE 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 NISOURCE. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of NISOURCE INC has no effect on the direction of Caterpillar i.e., Caterpillar and NISOURCE go up and down completely randomly.

Pair Corralation between Caterpillar and NISOURCE

Considering the 90-day investment horizon Caterpillar is expected to generate 1.67 times more return on investment than NISOURCE. However, Caterpillar is 1.67 times more volatile than NISOURCE INC. It trades about -0.05 of its potential returns per unit of risk. NISOURCE INC is currently generating about -0.1 per unit of risk. If you would invest  36,353  in Caterpillar on December 27, 2024 and sell it today you would lose (2,242) from holding Caterpillar or give up 6.17% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	78.33%
Values	Daily Returns

Caterpillar  vs.  NISOURCE 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.

NISOURCE INC

Risk-Adjusted Performance

Very Weak

Over the last 90 days NISOURCE INC has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, NISOURCE 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 NISOURCE

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

The idea behind Caterpillar and NISOURCE 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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.