Correlation Between McDonalds and Caterpillar

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

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

Diversification Opportunities for McDonalds and Caterpillar

0.55

Correlation Coefficient

McDonalds  Caterpillar

Very weak diversification

The 3 months correlation between McDonalds and Caterpillar is 0.55. Overlapping area represents the amount of risk that can be diversified away by holding McDonalds and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and McDonalds 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 McDonalds 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 McDonalds i.e., McDonalds and Caterpillar go up and down completely randomly.

Pair Corralation between McDonalds and Caterpillar

Considering the 90-day investment horizon McDonalds is expected to generate 4.45 times less return on investment than Caterpillar. But when comparing it to its historical volatility, McDonalds is 1.8 times less risky than Caterpillar. It trades about 0.05 of its potential returns per unit of risk. Caterpillar is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest  35,483  in Caterpillar on August 30, 2024 and sell it today you would earn a total of  4,887  from holding Caterpillar or generate 13.77% return on investment over 90 days.

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

McDonalds  vs.  Caterpillar

McDonalds

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in McDonalds are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound fundamental indicators, McDonalds is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Caterpillar

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with McDonalds and Caterpillar

The main advantage of trading using opposite McDonalds and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if McDonalds 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 McDonalds 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 Sectors module to list of equity sectors categorizing publicly traded companies based on their primary business activities.