Correlation Between Terex and Caterpillar

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

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

Diversification Opportunities for Terex and Caterpillar

0.87

Correlation Coefficient

Terex  Caterpillar

Very poor diversification

The 3 months correlation between Terex and Caterpillar is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Terex and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Terex 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 Terex 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 Terex i.e., Terex and Caterpillar go up and down completely randomly.

Pair Corralation between Terex and Caterpillar

Considering the 90-day investment horizon Terex is expected to under-perform the Caterpillar. In addition to that, Terex is 1.42 times more volatile than Caterpillar. It trades about -0.07 of its total potential returns per unit of risk. Caterpillar is currently generating about -0.05 per unit of volatility. If you would invest  36,168  in Caterpillar on December 28, 2024 and sell it today you would lose (2,238) from holding Caterpillar or give up 6.19% of portfolio value over 90 days.

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

Terex  vs.  Caterpillar

Terex

Risk-Adjusted Performance

Very Weak

Over the last 90 days Terex has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest conflicting performance, the Stock's technical and fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the company investors.

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 Terex and Caterpillar

The main advantage of trading using opposite Terex and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Terex 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 Terex 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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.