Correlation Between Volvo AB and Caterpillar

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

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

Diversification Opportunities for Volvo AB and Caterpillar

0.14

Correlation Coefficient

Volvo AB  Caterpillar

Average diversification

The 3 months correlation between Volvo and Caterpillar is 0.14. Overlapping area represents the amount of risk that can be diversified away by holding Volvo AB ADR and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Volvo AB 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 Volvo AB ADR 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 Volvo AB i.e., Volvo AB and Caterpillar go up and down completely randomly.

Pair Corralation between Volvo AB and Caterpillar

Assuming the 90 days horizon Volvo AB is expected to generate 1.06 times less return on investment than Caterpillar. In addition to that, Volvo AB is 1.01 times more volatile than Caterpillar. It trades about 0.06 of its total potential returns per unit of risk. Caterpillar is currently generating about 0.06 per unit of volatility. If you would invest  23,039  in Caterpillar on September 21, 2024 and sell it today you would earn a total of  12,998  from holding Caterpillar or generate 56.42% return on investment over 90 days.

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

Volvo AB ADR  vs.  Caterpillar

Volvo AB ADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Volvo AB ADR has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong essential indicators, Volvo AB is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Caterpillar

Risk-Adjusted Performance

0 of 100

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 Volvo AB and Caterpillar

The main advantage of trading using opposite Volvo AB and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Volvo AB 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 Volvo AB ADR 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 Money Flow Index module to determine momentum by analyzing Money Flow Index and other technical indicators.