Correlation Between Caterpillar and Nasdaq

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

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

Diversification Opportunities for Caterpillar and Nasdaq

0.53

Correlation Coefficient

Caterpillar  Nasdaq

Very weak diversification

The 3 months correlation between Caterpillar and Nasdaq is 0.53. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Nasdaq Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nasdaq Inc 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 Nasdaq. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nasdaq Inc has no effect on the direction of Caterpillar i.e., Caterpillar and Nasdaq go up and down completely randomly.

Pair Corralation between Caterpillar and Nasdaq

Considering the 90-day investment horizon Caterpillar is expected to generate 1.05 times less return on investment than Nasdaq. In addition to that, Caterpillar is 1.93 times more volatile than Nasdaq Inc. It trades about 0.11 of its total potential returns per unit of risk. Nasdaq Inc is currently generating about 0.23 per unit of volatility. If you would invest  7,184  in Nasdaq Inc on August 30, 2024 and sell it today you would earn a total of  1,121  from holding Nasdaq Inc or generate 15.6% return on investment over 90 days.

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

Caterpillar  vs.  Nasdaq Inc

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.

Nasdaq Inc

Risk-Adjusted Performance

18 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Nasdaq Inc are ranked lower than 18 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady basic indicators, Nasdaq reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Caterpillar and Nasdaq

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

The idea behind Caterpillar and Nasdaq Inc 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 Volatility Analysis module to get historical volatility and risk analysis based on latest market data.