Correlation Between Ecopetrol and Caterpillar

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

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

Diversification Opportunities for Ecopetrol and Caterpillar

-0.51

Correlation Coefficient

Ecopetrol  Caterpillar

Excellent diversification

The 3 months correlation between Ecopetrol and Caterpillar is -0.51. Overlapping area represents the amount of risk that can be diversified away by holding Ecopetrol SA and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Ecopetrol 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 Ecopetrol SA 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 Ecopetrol i.e., Ecopetrol and Caterpillar go up and down completely randomly.

Pair Corralation between Ecopetrol and Caterpillar

Assuming the 90 days trading horizon Ecopetrol SA is expected to under-perform the Caterpillar. In addition to that, Ecopetrol is 1.08 times more volatile than Caterpillar. It trades about -0.02 of its total potential returns per unit of risk. Caterpillar is currently generating about 0.15 per unit of volatility. If you would invest  31,029  in Caterpillar on September 13, 2024 and sell it today you would earn a total of  5,971  from holding Caterpillar or generate 19.24% return on investment over 90 days.

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

Ecopetrol SA  vs.  Caterpillar

Ecopetrol SA

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Ecopetrol SA has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable technical indicators, Ecopetrol is not utilizing all of its potentials. The current stock price disturbance, may contribute to mid-run losses for the stockholders.

Caterpillar

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile basic indicators, Caterpillar exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Ecopetrol and Caterpillar

The main advantage of trading using opposite Ecopetrol and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Ecopetrol 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 Ecopetrol SA 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.