Correlation Between Caterpillar and American Express

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

By analyzing existing cross correlation between Caterpillar and American Express, you can compare the effects of market volatilities on Caterpillar and American Express 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 American Express. Check out your portfolio center. Please also check ongoing floating volatility patterns of Caterpillar and American Express.

Diversification Opportunities for Caterpillar and American Express

0.82

Correlation Coefficient

Caterpillar  American Express

Very poor diversification

The 3 months correlation between Caterpillar and American is 0.82. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and American Express in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on American Express 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 American Express. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of American Express has no effect on the direction of Caterpillar i.e., Caterpillar and American Express go up and down completely randomly.

Pair Corralation between Caterpillar and American Express

Considering the 90-day investment horizon Caterpillar is expected to generate 1.01 times less return on investment than American Express. In addition to that, Caterpillar is 1.11 times more volatile than American Express. It trades about 0.16 of its total potential returns per unit of risk. American Express is currently generating about 0.18 per unit of volatility. If you would invest  25,108  in American Express on September 4, 2024 and sell it today you would earn a total of  5,103  from holding American Express or generate 20.32% return on investment over 90 days.

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

Caterpillar  vs.  American Express

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

American Express

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in American Express are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. Even with relatively unfluctuating basic indicators, American Express reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Caterpillar and American Express

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

The idea behind Caterpillar and American Express 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 Portfolio Center module to all portfolio management and optimization tools to improve performance of your portfolios.