Correlation Between Caterpillar and Hydrofarm Holdings

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

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

Diversification Opportunities for Caterpillar and Hydrofarm Holdings

0.26

Correlation Coefficient

Caterpillar  Hydrofarm Holdings

Modest diversification

The 3 months correlation between Caterpillar and Hydrofarm is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Hydrofarm Holdings Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Hydrofarm Holdings 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 Hydrofarm Holdings. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Hydrofarm Holdings has no effect on the direction of Caterpillar i.e., Caterpillar and Hydrofarm Holdings go up and down completely randomly.

Pair Corralation between Caterpillar and Hydrofarm Holdings

Considering the 90-day investment horizon Caterpillar is expected to generate 5.22 times less return on investment than Hydrofarm Holdings. But when comparing it to its historical volatility, Caterpillar is 2.78 times less risky than Hydrofarm Holdings. It trades about 0.09 of its potential returns per unit of risk. Hydrofarm Holdings Group is currently generating about 0.16 of returns per unit of risk over similar time horizon. If you would invest  68.00  in Hydrofarm Holdings Group on August 30, 2024 and sell it today you would earn a total of  15.00  from holding Hydrofarm Holdings Group or generate 22.06% return on investment over 90 days.

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

Caterpillar  vs.  Hydrofarm Holdings Group

Caterpillar

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 8 (%) 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.

Hydrofarm Holdings

Risk-Adjusted Performance

17 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Hydrofarm Holdings Group are ranked lower than 17 (%) of all global equities and portfolios over the last 90 days. In spite of very unsteady technical and fundamental indicators, Hydrofarm Holdings displayed solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Caterpillar and Hydrofarm Holdings

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

The idea behind Caterpillar and Hydrofarm Holdings Group 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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.