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 Total, 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

-0.55

Correlation Coefficient

Caterpillar  Western Asset

Excellent diversification

The 3 months correlation between Caterpillar and Western is -0.55. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Western Asset Total in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Western Asset Total 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 Total 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 generate 5.22 times more return on investment than Western Asset. However, Caterpillar is 5.22 times more volatile than Western Asset Total. It trades about 0.16 of its potential returns per unit of risk. Western Asset Total is currently generating about -0.08 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	Very Weak
Accuracy	100.0%
Values	Daily Returns

Caterpillar  vs.  Western Asset Total

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.

Western Asset Total

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Western Asset Total has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Western Asset is not utilizing all of its potentials. The latest stock price tumult, may contribute to shorter-term losses for the shareholders.

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 Total 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.

Check out your portfolio center.

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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.