Correlation Between Webster Financial and Caterpillar

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

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

Diversification Opportunities for Webster Financial and Caterpillar

0.73

Correlation Coefficient

Webster Financial  Caterpillar

Poor diversification

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

Pair Corralation between Webster Financial and Caterpillar

Assuming the 90 days horizon Webster Financial is expected to generate 1.65 times more return on investment than Caterpillar. However, Webster Financial is 1.65 times more volatile than Caterpillar. It trades about 0.19 of its potential returns per unit of risk. Caterpillar is currently generating about 0.15 per unit of risk. If you would invest  3,887  in Webster Financial on September 13, 2024 and sell it today you would earn a total of  1,663  from holding Webster Financial or generate 42.78% return on investment over 90 days.

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

Webster Financial  vs.  Caterpillar

Webster Financial

Risk-Adjusted Performance

15 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Webster Financial are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile basic indicators, Webster Financial reported solid returns over the last few months and may actually be approaching a breakup point.

Caterpillar

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile basic indicators, Caterpillar exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Webster Financial and Caterpillar

The main advantage of trading using opposite Webster Financial and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Webster Financial 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 Webster Financial 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 Watchlist Optimization module to optimize watchlists to build efficient portfolios or rebalance existing positions based on the mean-variance optimization algorithm.