Correlation Between Komatsu and Caterpillar

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

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

Diversification Opportunities for Komatsu and Caterpillar

0.47

Correlation Coefficient

Komatsu  Caterpillar

Very weak diversification

The 3 months correlation between Komatsu and Caterpillar is 0.47. Overlapping area represents the amount of risk that can be diversified away by holding Komatsu and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Komatsu 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 Komatsu 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 Komatsu i.e., Komatsu and Caterpillar go up and down completely randomly.

Pair Corralation between Komatsu and Caterpillar

Assuming the 90 days horizon Komatsu is expected to generate 1.45 times less return on investment than Caterpillar. But when comparing it to its historical volatility, Komatsu is 1.46 times less risky than Caterpillar. It trades about 0.07 of its potential returns per unit of risk. Caterpillar is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  35,242  in Caterpillar on September 17, 2024 and sell it today you would earn a total of  2,809  from holding Caterpillar or generate 7.97% return on investment over 90 days.

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

Komatsu  vs.  Caterpillar

Komatsu

Risk-Adjusted Performance

5 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Komatsu are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly strong basic indicators, Komatsu is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Caterpillar

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating basic indicators, Caterpillar may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Komatsu and Caterpillar

The main advantage of trading using opposite Komatsu and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Komatsu 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 Komatsu 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.

Check out your portfolio center.

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 USA ETFs module to find actively traded Exchange Traded Funds (ETF) in USA.