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

-0.69

Correlation Coefficient

Ecopetrol  Caterpillar

Excellent diversification

The 3 months correlation between Ecopetrol and Caterpillar is -0.69. 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 generate 1.53 times more return on investment than Caterpillar. However, Ecopetrol is 1.53 times more volatile than Caterpillar. It trades about 0.19 of its potential returns per unit of risk. Caterpillar is currently generating about -0.15 per unit of risk. If you would invest  740.00  in Ecopetrol SA on December 2, 2024 and sell it today you would earn a total of  224.00  from holding Ecopetrol SA or generate 30.27% return on investment over 90 days.

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

Ecopetrol SA  vs.  Caterpillar

Ecopetrol SA

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Ecopetrol SA are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively fragile basic indicators, Ecopetrol unveiled solid returns over the last few months and may actually be approaching a breakup point.

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 fragile 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.

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 FinTech Suite module to use AI to screen and filter profitable investment opportunities.