Correlation Between Caterpillar and Aurora Solar

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

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

Diversification Opportunities for Caterpillar and Aurora Solar

-0.54

Correlation Coefficient

Caterpillar  Aurora Solar

Excellent diversification

The 3 months correlation between Caterpillar and Aurora is -0.54. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Aurora Solar Technologies in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Aurora Solar Technologies and Caterpillar 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 Caterpillar are associated (or correlated) with Aurora Solar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Aurora Solar Technologies has no effect on the direction of Caterpillar i.e., Caterpillar and Aurora Solar go up and down completely randomly.

Pair Corralation between Caterpillar and Aurora Solar

Considering the 90-day investment horizon Caterpillar is expected to generate 6.51 times less return on investment than Aurora Solar. But when comparing it to its historical volatility, Caterpillar is 8.95 times less risky than Aurora Solar. It trades about 0.08 of its potential returns per unit of risk. Aurora Solar Technologies is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  2.30  in Aurora Solar Technologies on September 12, 2024 and sell it today you would lose (0.60) from holding Aurora Solar Technologies or give up 26.09% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Very Weak
Accuracy	99.7%
Values	Daily Returns

Caterpillar  vs.  Aurora Solar Technologies

Caterpillar

Risk-Adjusted Performance

9 of 100

OK

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

Aurora Solar Technologies

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Aurora Solar Technologies has generated negative risk-adjusted returns adding no value to investors with long positions. Despite latest unsteady performance, the Stock's basic indicators remain stable and the current disturbance on Wall Street may also be a sign of long-run gains for the company stockholders.

Pair Trading with Caterpillar and Aurora Solar

The main advantage of trading using opposite Caterpillar and Aurora Solar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar position performs unexpectedly, Aurora Solar 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 Aurora Solar will offset losses from the drop in Aurora Solar's long position.

The idea behind Caterpillar and Aurora Solar Technologies 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 Pair Correlation module to compare performance and examine fundamental relationship between any two equity instruments.