Correlation Between Caterpillar and Silicon Motion

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

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

Diversification Opportunities for Caterpillar and Silicon Motion

-0.5

Correlation Coefficient

Caterpillar  Silicon Motion

Very good diversification

The 3 months correlation between Caterpillar and Silicon is -0.5. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Silicon Motion Technology in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Silicon Motion Technology 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 Silicon Motion. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Silicon Motion Technology has no effect on the direction of Caterpillar i.e., Caterpillar and Silicon Motion go up and down completely randomly.

Pair Corralation between Caterpillar and Silicon Motion

Assuming the 90 days trading horizon Caterpillar is expected to under-perform the Silicon Motion. But the stock apears to be less risky and, when comparing its historical volatility, Caterpillar is 1.64 times less risky than Silicon Motion. The stock trades about -0.15 of its potential returns per unit of risk. The Silicon Motion Technology is currently generating about 0.03 of returns per unit of risk over similar time horizon. If you would invest  5,250  in Silicon Motion Technology on December 4, 2024 and sell it today you would earn a total of  150.00  from holding Silicon Motion Technology or generate 2.86% 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.  Silicon Motion Technology

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.

Silicon Motion Technology

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Silicon Motion Technology are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, Silicon Motion is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Caterpillar and Silicon Motion

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

The idea behind Caterpillar and Silicon Motion Technology 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..