Correlation Between Caterpillar and Traton SE

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

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

Diversification Opportunities for Caterpillar and Traton SE

0.02

Correlation Coefficient

Caterpillar  Traton SE

Significant diversification

The 3 months correlation between Caterpillar and Traton is 0.02. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Traton SE in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Traton SE 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 Traton SE. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Traton SE has no effect on the direction of Caterpillar i.e., Caterpillar and Traton SE go up and down completely randomly.

Pair Corralation between Caterpillar and Traton SE

Assuming the 90 days trading horizon Caterpillar is expected to under-perform the Traton SE. But the stock apears to be less risky and, when comparing its historical volatility, Caterpillar is 1.82 times less risky than Traton SE. The stock trades about -0.26 of its potential returns per unit of risk. The Traton SE is currently generating about -0.07 of returns per unit of risk over similar time horizon. If you would invest  2,870  in Traton SE on September 23, 2024 and sell it today you would lose (110.00) from holding Traton SE or give up 3.83% of portfolio value over 90 days.

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

Caterpillar  vs.  Traton SE

Caterpillar

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite nearly unsteady basic indicators, Caterpillar may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Traton SE

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Traton SE has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Traton SE 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 Traton SE

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

The idea behind Caterpillar and Traton SE 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.