Correlation Between Caterpillar and Verizon Communications

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

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

Diversification Opportunities for Caterpillar and Verizon Communications

-0.72

Correlation Coefficient

Caterpillar  Verizon Communications

Pay attention - limited upside

The 3 months correlation between Caterpillar and Verizon is -0.72. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Verizon Communications in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Verizon Communications 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 Verizon Communications. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Verizon Communications has no effect on the direction of Caterpillar i.e., Caterpillar and Verizon Communications go up and down completely randomly.

Pair Corralation between Caterpillar and Verizon Communications

Considering the 90-day investment horizon Caterpillar is expected to under-perform the Verizon Communications. In addition to that, Caterpillar is 1.13 times more volatile than Verizon Communications. It trades about -0.08 of its total potential returns per unit of risk. Verizon Communications is currently generating about 0.16 per unit of volatility. If you would invest  3,889  in Verizon Communications on December 30, 2024 and sell it today you would earn a total of  604.00  from holding Verizon Communications or generate 15.53% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Weak
Accuracy	100.0%
Values	Daily Returns

Caterpillar  vs.  Verizon Communications

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 latest unfluctuating 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.

Verizon Communications

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Verizon Communications are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of fairly weak basic indicators, Verizon Communications showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Caterpillar and Verizon Communications

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

The idea behind Caterpillar and Verizon Communications 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 Sync Your Broker module to sync your existing holdings, watchlists, positions or portfolios from thousands of online brokerage services, banks, investment account aggregators and robo-advisors..