Correlation Between Japan Post and Caterpillar

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

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

Diversification Opportunities for Japan Post and Caterpillar

0.53

Correlation Coefficient

Japan Post  Caterpillar

Very weak diversification

The 3 months correlation between Japan and Caterpillar is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding Japan Post Insurance and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Japan Post 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 Japan Post Insurance 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 Japan Post i.e., Japan Post and Caterpillar go up and down completely randomly.

Pair Corralation between Japan Post and Caterpillar

Assuming the 90 days trading horizon Japan Post Insurance is expected to generate 1.98 times more return on investment than Caterpillar. However, Japan Post is 1.98 times more volatile than Caterpillar. It trades about 0.27 of its potential returns per unit of risk. Caterpillar is currently generating about -0.03 per unit of risk. If you would invest  1,620  in Japan Post Insurance on September 14, 2024 and sell it today you would earn a total of  240.00  from holding Japan Post Insurance or generate 14.81% return on investment over 90 days.

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

Japan Post Insurance  vs.  Caterpillar

Japan Post Insurance

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Japan Post Insurance are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively uncertain basic indicators, Japan Post unveiled solid returns over the last few months and may actually be approaching a breakup point.

Caterpillar

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain basic indicators, Caterpillar exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Japan Post and Caterpillar

The main advantage of trading using opposite Japan Post and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Japan Post 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 Japan Post Insurance 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.