Correlation Between Caterpillar and Japan Post

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

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

Diversification Opportunities for Caterpillar and Japan Post

0.3

Correlation Coefficient

Caterpillar  Japan Post

Weak diversification

The 3 months correlation between Caterpillar and Japan is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Japan Post Insurance in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Japan Post Insurance 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 Japan Post. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Japan Post Insurance has no effect on the direction of Caterpillar i.e., Caterpillar and Japan Post go up and down completely randomly.

Pair Corralation between Caterpillar and Japan Post

Assuming the 90 days trading horizon Caterpillar is expected to under-perform the Japan Post. In addition to that, Caterpillar is 1.22 times more volatile than Japan Post Insurance. It trades about -0.15 of its total potential returns per unit of risk. Japan Post Insurance is currently generating about -0.07 per unit of volatility. If you would invest  1,980  in Japan Post Insurance on December 4, 2024 and sell it today you would lose (110.00) from holding Japan Post Insurance or give up 5.56% of portfolio value over 90 days.

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

Caterpillar  vs.  Japan Post Insurance

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 uncertain performance in the last few months, the Stock's basic indicators remain rather sound which may send shares a bit higher in April 2025. The latest tumult may also be a sign of longer-term up-swing for the firm shareholders.

Japan Post Insurance

Risk-Adjusted Performance

Very Weak

Over the last 90 days Japan Post Insurance has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable basic indicators, Japan Post is not utilizing all of its potentials. The current stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Caterpillar and Japan Post

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

The idea behind Caterpillar and Japan Post Insurance 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 Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.