Correlation Between Caterpillar and KOMATSU

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

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

Diversification Opportunities for Caterpillar and KOMATSU

-0.49

Correlation Coefficient

Caterpillar  KOMATSU

Very good diversification

The 3 months correlation between Caterpillar and KOMATSU is -0.49. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and KOMATSU LTD SPONS in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on KOMATSU LTD SPONS 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 KOMATSU. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of KOMATSU LTD SPONS has no effect on the direction of Caterpillar i.e., Caterpillar and KOMATSU go up and down completely randomly.

Pair Corralation between Caterpillar and KOMATSU

Assuming the 90 days trading horizon Caterpillar is expected to generate 0.97 times more return on investment than KOMATSU. However, Caterpillar is 1.03 times less risky than KOMATSU. It trades about 0.07 of its potential returns per unit of risk. KOMATSU LTD SPONS is currently generating about 0.05 per unit of risk. If you would invest  21,936  in Caterpillar on December 7, 2024 and sell it today you would earn a total of  10,264  from holding Caterpillar or generate 46.79% 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.  KOMATSU LTD SPONS

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. Despite uncertain performance in the last few months, the Stock's basic indicators remain nearly stable which may send shares a bit higher in April 2025. The current disturbance may also be a sign of long-run up-swing for the company stockholders.

KOMATSU LTD SPONS

Risk-Adjusted Performance

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in KOMATSU LTD SPONS are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile primary indicators, KOMATSU may actually be approaching a critical reversion point that can send shares even higher in April 2025.

Pair Trading with Caterpillar and KOMATSU

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

The idea behind Caterpillar and KOMATSU LTD SPONS 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.