Correlation Between WESTLAKE CHEMICAL and Caterpillar

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

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

Diversification Opportunities for WESTLAKE CHEMICAL and Caterpillar

0.83

Correlation Coefficient

WESTLAKE CHEMICAL  Caterpillar

Very poor diversification

The 3 months correlation between WESTLAKE and Caterpillar is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding WESTLAKE CHEMICAL and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and WESTLAKE CHEMICAL 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 WESTLAKE CHEMICAL 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 WESTLAKE CHEMICAL i.e., WESTLAKE CHEMICAL and Caterpillar go up and down completely randomly.

Pair Corralation between WESTLAKE CHEMICAL and Caterpillar

Assuming the 90 days trading horizon WESTLAKE CHEMICAL is expected to generate 1.13 times more return on investment than Caterpillar. However, WESTLAKE CHEMICAL is 1.13 times more volatile than Caterpillar. It trades about -0.11 of its potential returns per unit of risk. Caterpillar is currently generating about -0.15 per unit of risk. If you would invest  12,200  in WESTLAKE CHEMICAL on December 2, 2024 and sell it today you would lose (1,500) from holding WESTLAKE CHEMICAL or give up 12.3% of portfolio value over 90 days.

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

WESTLAKE CHEMICAL  vs.  Caterpillar

WESTLAKE CHEMICAL

Risk-Adjusted Performance

Very Weak

Over the last 90 days WESTLAKE CHEMICAL has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest fragile performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private 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 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 WESTLAKE CHEMICAL and Caterpillar

The main advantage of trading using opposite WESTLAKE CHEMICAL and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if WESTLAKE CHEMICAL 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 WESTLAKE CHEMICAL 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.