Correlation Between Caterpillar and Ultrashort Dow

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

By analyzing existing cross correlation between Caterpillar and Ultrashort Dow 30, you can compare the effects of market volatilities on Caterpillar and Ultrashort Dow 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 Ultrashort Dow. Check out your portfolio center. Please also check ongoing floating volatility patterns of Caterpillar and Ultrashort Dow.

Diversification Opportunities for Caterpillar and Ultrashort Dow

-0.34

Correlation Coefficient

Caterpillar  Ultrashort Dow

Very good diversification

The 3 months correlation between Caterpillar and Ultrashort is -0.34. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Ultrashort Dow 30 in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ultrashort Dow 30 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 Ultrashort Dow. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ultrashort Dow 30 has no effect on the direction of Caterpillar i.e., Caterpillar and Ultrashort Dow go up and down completely randomly.

Pair Corralation between Caterpillar and Ultrashort Dow

Considering the 90-day investment horizon Caterpillar is expected to under-perform the Ultrashort Dow. But the stock apears to be less risky and, when comparing its historical volatility, Caterpillar is 1.59 times less risky than Ultrashort Dow. The stock trades about -0.43 of its potential returns per unit of risk. The Ultrashort Dow 30 is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  980.00  in Ultrashort Dow 30 on October 4, 2024 and sell it today you would earn a total of  63.00  from holding Ultrashort Dow 30 or generate 6.43% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	95.45%
Values	Daily Returns

Caterpillar  vs.  Ultrashort Dow 30

Caterpillar

Risk-Adjusted Performance

0 of 100

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 latest uncertain performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Ultrashort Dow 30

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Ultrashort Dow 30 has generated negative risk-adjusted returns adding no value to fund investors. In spite of fairly strong basic indicators, Ultrashort Dow 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 Ultrashort Dow

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

The idea behind Caterpillar and Ultrashort Dow 30 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.