Correlation Between Deere and Caterpillar

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

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

Diversification Opportunities for Deere and Caterpillar

0.78

Correlation Coefficient

Deere  Caterpillar

Poor diversification

The 3 months correlation between Deere and Caterpillar is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Deere Company and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Deere 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 Deere Company 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 Deere i.e., Deere and Caterpillar go up and down completely randomly.

Pair Corralation between Deere and Caterpillar

Assuming the 90 days trading horizon Deere Company is expected to generate 0.81 times more return on investment than Caterpillar. However, Deere Company is 1.23 times less risky than Caterpillar. It trades about 0.25 of its potential returns per unit of risk. Caterpillar is currently generating about 0.2 per unit of risk. If you would invest  34,474  in Deere Company on September 5, 2024 and sell it today you would earn a total of  9,426  from holding Deere Company or generate 27.34% return on investment over 90 days.

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

Deere Company  vs.  Caterpillar

Deere Company

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Deere Company are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile basic indicators, Deere unveiled 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 Deere and Caterpillar

The main advantage of trading using opposite Deere and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Deere 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 Deere Company 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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.