Correlation Between GE Aerospace and Caterpillar

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

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

Diversification Opportunities for GE Aerospace and Caterpillar

-0.03

Correlation Coefficient

GE Aerospace  Caterpillar

Good diversification

The 3 months correlation between GE Aerospace and Caterpillar is -0.03. Overlapping area represents the amount of risk that can be diversified away by holding GE Aerospace and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and GE Aerospace 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 GE Aerospace 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 GE Aerospace i.e., GE Aerospace and Caterpillar go up and down completely randomly.

Pair Corralation between GE Aerospace and Caterpillar

Allowing for the 90-day total investment horizon GE Aerospace is expected to generate 1.13 times more return on investment than Caterpillar. However, GE Aerospace is 1.13 times more volatile than Caterpillar. It trades about 0.16 of its potential returns per unit of risk. Caterpillar is currently generating about -0.07 per unit of risk. If you would invest  17,769  in GE Aerospace on November 20, 2024 and sell it today you would earn a total of  3,058  from holding GE Aerospace or generate 17.21% return on investment over 90 days.

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

GE Aerospace  vs.  Caterpillar

GE Aerospace

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in GE Aerospace are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather abnormal technical and fundamental indicators, GE Aerospace exhibited 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 latest unfluctuating performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Pair Trading with GE Aerospace and Caterpillar

The main advantage of trading using opposite GE Aerospace and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if GE Aerospace 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 GE Aerospace 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.