Correlation Between Caterpillar and Western Asset

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

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

Diversification Opportunities for Caterpillar and Western Asset

-0.21

Correlation Coefficient

Caterpillar  Western Asset

Very good diversification

The 3 months correlation between Caterpillar and Western is -0.21. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Western Asset Smash in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Western Asset Smash 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 Western Asset. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Western Asset Smash has no effect on the direction of Caterpillar i.e., Caterpillar and Western Asset go up and down completely randomly.

Pair Corralation between Caterpillar and Western Asset

Considering the 90-day investment horizon Caterpillar is expected to under-perform the Western Asset. In addition to that, Caterpillar is 4.2 times more volatile than Western Asset Smash. It trades about -0.17 of its total potential returns per unit of risk. Western Asset Smash is currently generating about 0.12 per unit of volatility. If you would invest  602.00  in Western Asset Smash on November 29, 2024 and sell it today you would earn a total of  16.00  from holding Western Asset Smash or generate 2.66% return on investment over 90 days.

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

Caterpillar  vs.  Western Asset Smash

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 weak performance in the last few months, the Stock's basic indicators remain comparatively stable which may send shares a bit higher in March 2025. The newest uproar may also be a sign of mid-term up-swing for the firm private investors.

Western Asset Smash

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Western Asset Smash are ranked lower than 9 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong fundamental indicators, Western Asset 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 Western Asset

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

The idea behind Caterpillar and Western Asset Smash 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.