Correlation Between Caterpillar and China National

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

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

Diversification Opportunities for Caterpillar and China National

0.83

Correlation Coefficient

Caterpillar  China National

Very poor diversification

The 3 months correlation between Caterpillar and China is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and China National Building in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on China National Building 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 China National. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of China National Building has no effect on the direction of Caterpillar i.e., Caterpillar and China National go up and down completely randomly.

Pair Corralation between Caterpillar and China National

Considering the 90-day investment horizon Caterpillar is expected to generate 2.47 times less return on investment than China National. But when comparing it to its historical volatility, Caterpillar is 2.97 times less risky than China National. It trades about 0.16 of its potential returns per unit of risk. China National Building is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  1,455  in China National Building on September 2, 2024 and sell it today you would earn a total of  666.00  from holding China National Building or generate 45.77% return on investment over 90 days.

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

Caterpillar  vs.  China National Building

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.

China National Building

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in China National Building are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of fairly fragile primary indicators, China National showed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Caterpillar and China National

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

The idea behind Caterpillar and China National Building 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.

Check out your portfolio center.

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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.