Correlation Between Rev and Caterpillar

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

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

Diversification Opportunities for Rev and Caterpillar

0.73

Correlation Coefficient

Rev  Caterpillar

Poor diversification

The 3 months correlation between Rev and Caterpillar is 0.73. Overlapping area represents the amount of risk that can be diversified away by holding Rev Group and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Rev 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 Rev Group 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 Rev i.e., Rev and Caterpillar go up and down completely randomly.

Pair Corralation between Rev and Caterpillar

Given the investment horizon of 90 days Rev Group is expected to generate 1.57 times more return on investment than Caterpillar. However, Rev is 1.57 times more volatile than Caterpillar. It trades about 0.05 of its potential returns per unit of risk. Caterpillar is currently generating about -0.05 per unit of risk. If you would invest  3,132  in Rev Group on December 28, 2024 and sell it today you would earn a total of  198.00  from holding Rev Group or generate 6.32% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.36%
Values	Daily Returns

Rev Group  vs.  Caterpillar

Rev Group

Risk-Adjusted Performance

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Rev Group are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly unfluctuating basic indicators, Rev may actually be approaching a critical reversion point that can send shares even higher in April 2025.

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 comparatively stable basic indicators, Caterpillar is not utilizing all of its potentials. The recent stock price uproar, may contribute to short-horizon losses for the private investors.

Pair Trading with Rev and Caterpillar

The main advantage of trading using opposite Rev and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Rev 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 Rev Group 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 Financial Widgets module to easily integrated Macroaxis content with over 30 different plug-and-play financial widgets.