Correlation Between Caterpillar and Demant A/S

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

By analyzing existing cross correlation between Caterpillar and Demant AS ADR, you can compare the effects of market volatilities on Caterpillar and Demant A/S 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 Demant A/S. Check out your portfolio center. Please also check ongoing floating volatility patterns of Caterpillar and Demant A/S.

Diversification Opportunities for Caterpillar and Demant A/S

0.75

Correlation Coefficient

Caterpillar  Demant A/S

Poor diversification

The 3 months correlation between Caterpillar and Demant is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Demant AS ADR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Demant AS ADR 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 Demant A/S. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Demant AS ADR has no effect on the direction of Caterpillar i.e., Caterpillar and Demant A/S go up and down completely randomly.

Pair Corralation between Caterpillar and Demant A/S

Considering the 90-day investment horizon Caterpillar is expected to under-perform the Demant A/S. In addition to that, Caterpillar is 1.17 times more volatile than Demant AS ADR. It trades about -0.08 of its total potential returns per unit of risk. Demant AS ADR is currently generating about 0.0 per unit of volatility. If you would invest  1,830  in Demant AS ADR on December 30, 2024 and sell it today you would lose (10.00) from holding Demant AS ADR or give up 0.55% of portfolio value over 90 days.

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

Caterpillar  vs.  Demant AS ADR

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.

Demant AS ADR

Risk-Adjusted Performance

Very Weak

Over the last 90 days Demant AS ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong basic indicators, Demant A/S 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 Demant A/S

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

The idea behind Caterpillar and Demant AS ADR 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 Search module to search for actively traded equities including funds and ETFs from over 30 global markets.