Correlation Between Caterpillar and Pacific Financial

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

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

Diversification Opportunities for Caterpillar and Pacific Financial

0.58

Correlation Coefficient

Caterpillar  Pacific Financial

Very weak diversification

The 3 months correlation between Caterpillar and Pacific is 0.58. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Pacific Financial Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Pacific Financial 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 Pacific Financial. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Pacific Financial Corp has no effect on the direction of Caterpillar i.e., Caterpillar and Pacific Financial go up and down completely randomly.

Pair Corralation between Caterpillar and Pacific Financial

Considering the 90-day investment horizon Caterpillar is expected to generate 1.63 times more return on investment than Pacific Financial. However, Caterpillar is 1.63 times more volatile than Pacific Financial Corp. It trades about 0.12 of its potential returns per unit of risk. Pacific Financial Corp is currently generating about 0.14 per unit of risk. If you would invest  33,836  in Caterpillar on September 12, 2024 and sell it today you would earn a total of  5,003  from holding Caterpillar or generate 14.79% return on investment over 90 days.

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

Caterpillar  vs.  Pacific Financial 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.

Pacific Financial Corp

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Pacific Financial Corp are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of rather unsteady essential indicators, Pacific Financial may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Caterpillar and Pacific Financial

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

The idea behind Caterpillar and Pacific Financial 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 Portfolio Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.