Correlation Between Western Midstream and Caterpillar

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

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

Diversification Opportunities for Western Midstream and Caterpillar

0.26

Correlation Coefficient

Western Midstream  Caterpillar

Modest diversification

The 3 months correlation between Western and Caterpillar is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding Western Midstream Partners and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Western Midstream 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 Western Midstream Partners 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 Western Midstream i.e., Western Midstream and Caterpillar go up and down completely randomly.

Pair Corralation between Western Midstream and Caterpillar

Considering the 90-day investment horizon Western Midstream is expected to generate 1.93 times less return on investment than Caterpillar. But when comparing it to its historical volatility, Western Midstream Partners is 1.35 times less risky than Caterpillar. It trades about 0.11 of its potential returns per unit of risk. Caterpillar is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  33,902  in Caterpillar on September 3, 2024 and sell it today you would earn a total of  6,709  from holding Caterpillar or generate 19.79% return on investment over 90 days.

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

Western Midstream Partners  vs.  Caterpillar

Western Midstream

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Western Midstream Partners are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak technical and fundamental indicators, Western Midstream may actually be approaching a critical reversion point that can send shares even higher in January 2025.

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 comparatively fragile basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Western Midstream and Caterpillar

The main advantage of trading using opposite Western Midstream and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Western Midstream 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 Western Midstream Partners 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.