Correlation Between Cars and Caterpillar

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

By analyzing existing cross correlation between Cars Inc and Caterpillar, you can compare the effects of market volatilities on Cars and Caterpillar 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 Cars with a short position of Caterpillar. Check out your portfolio center. Please also check ongoing floating volatility patterns of Cars and Caterpillar.

Diversification Opportunities for Cars and Caterpillar

0.29

Correlation Coefficient

Cars  Caterpillar

Modest diversification

The 3 months correlation between Cars and Caterpillar is 0.29. Overlapping area represents the amount of risk that can be diversified away by holding Cars Inc and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Cars 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 Cars Inc are associated (or correlated) with Caterpillar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Caterpillar has no effect on the direction of Cars i.e., Cars and Caterpillar go up and down completely randomly.

Pair Corralation between Cars and Caterpillar

Assuming the 90 days horizon Cars is expected to generate 1.22 times less return on investment than Caterpillar. In addition to that, Cars is 1.3 times more volatile than Caterpillar. It trades about 0.12 of its total potential returns per unit of risk. Caterpillar is currently generating about 0.2 per unit of volatility. If you would invest  30,033  in Caterpillar on September 5, 2024 and sell it today you would earn a total of  7,817  from holding Caterpillar or generate 26.03% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	98.46%
Values	Daily Returns

Cars Inc  vs.  Caterpillar

Cars Inc

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Cars Inc are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Cars reported solid returns over the last few months and may actually be approaching a breakup point.

Caterpillar

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain basic indicators, Caterpillar exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Cars and Caterpillar

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

The idea behind Cars Inc and Caterpillar 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 Valuation module to check real value of public entities based on technical and fundamental data.