Correlation Between Caterpillar and Neutra Corp

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

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

Diversification Opportunities for Caterpillar and Neutra Corp

-0.39

Correlation Coefficient

Caterpillar  Neutra Corp

Very good diversification

The 3 months correlation between Caterpillar and Neutra is -0.39. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Neutra Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Neutra Corp 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 Neutra Corp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Neutra Corp has no effect on the direction of Caterpillar i.e., Caterpillar and Neutra Corp go up and down completely randomly.

Pair Corralation between Caterpillar and Neutra Corp

Considering the 90-day investment horizon Caterpillar is expected to generate 10.39 times less return on investment than Neutra Corp. But when comparing it to its historical volatility, Caterpillar is 16.21 times less risky than Neutra Corp. It trades about 0.12 of its potential returns per unit of risk. Neutra Corp is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  0.01  in Neutra Corp on September 12, 2024 and sell it today you would lose (0.01) from holding Neutra Corp or give up 100.0% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Insignificant
Accuracy	96.88%
Values	Daily Returns

Caterpillar  vs.  Neutra Corp

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.

Neutra Corp

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Neutra Corp are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Even with relatively inconsistent basic indicators, Neutra Corp reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Caterpillar and Neutra Corp

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

The idea behind Caterpillar and Neutra Corp 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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .