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 LTD SPONS 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

-0.57

Correlation Coefficient

KOMATSU  Caterpillar

Excellent diversification

The 3 months correlation between KOMATSU and Caterpillar is -0.57. Overlapping area represents the amount of risk that can be diversified away by holding KOMATSU LTD SPONS 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 LTD SPONS 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 trading horizon KOMATSU is expected to generate 1.41 times less return on investment than Caterpillar. In addition to that, KOMATSU is 1.07 times more volatile than Caterpillar. It trades about 0.04 of its total potential returns per unit of risk. Caterpillar is currently generating about 0.07 per unit of volatility. If you would invest  20,222  in Caterpillar on December 2, 2024 and sell it today you would earn a total of  12,728  from holding Caterpillar or generate 62.94% return on investment over 90 days.

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

KOMATSU LTD SPONS  vs.  Caterpillar

KOMATSU LTD SPONS

Risk-Adjusted Performance

Good

Compared to the overall equity markets, risk-adjusted returns on investments in KOMATSU LTD SPONS are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile primary indicators, KOMATSU reported 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 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 LTD SPONS 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 Cryptocurrency Center module to build and monitor diversified portfolio of extremely risky digital assets and cryptocurrency.