Correlation Between AB Volvo and Caterpillar

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

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

Diversification Opportunities for AB Volvo and Caterpillar

-0.69

Correlation Coefficient

AB Volvo  Caterpillar

Excellent diversification

The 3 months correlation between VOLAF and Caterpillar is -0.69. Overlapping area represents the amount of risk that can be diversified away by holding AB Volvo and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and AB Volvo 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 AB Volvo 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 AB Volvo i.e., AB Volvo and Caterpillar go up and down completely randomly.

Pair Corralation between AB Volvo and Caterpillar

Assuming the 90 days horizon AB Volvo is expected to generate 2.34 times more return on investment than Caterpillar. However, AB Volvo is 2.34 times more volatile than Caterpillar. It trades about 0.07 of its potential returns per unit of risk. Caterpillar is currently generating about -0.05 per unit of risk. If you would invest  2,576  in AB Volvo on December 29, 2024 and sell it today you would earn a total of  359.00  from holding AB Volvo or generate 13.94% return on investment over 90 days.

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

AB Volvo  vs.  Caterpillar

AB Volvo

Risk-Adjusted Performance

OK

Compared to the overall equity markets, risk-adjusted returns on investments in AB Volvo are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite nearly weak basic indicators, AB Volvo reported solid returns over the last few months and may actually be approaching a breakup point.

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 AB Volvo and Caterpillar

The main advantage of trading using opposite AB Volvo and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if AB Volvo 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 AB Volvo 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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.