Correlation Between Caterpillar and Invesco SP

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

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

Diversification Opportunities for Caterpillar and Invesco SP

0.85

Correlation Coefficient

Caterpillar  Invesco SP

Very poor diversification

The 3 months correlation between Caterpillar and Invesco is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Invesco SP MidCap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Invesco SP MidCap 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 Invesco SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Invesco SP MidCap has no effect on the direction of Caterpillar i.e., Caterpillar and Invesco SP go up and down completely randomly.

Pair Corralation between Caterpillar and Invesco SP

Considering the 90-day investment horizon Caterpillar is expected to generate 1.82 times more return on investment than Invesco SP. However, Caterpillar is 1.82 times more volatile than Invesco SP MidCap. It trades about 0.16 of its potential returns per unit of risk. Invesco SP MidCap is currently generating about 0.17 per unit of risk. If you would invest  33,554  in Caterpillar on September 4, 2024 and sell it today you would earn a total of  6,697  from holding Caterpillar or generate 19.96% return on investment over 90 days.

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

Caterpillar  vs.  Invesco SP MidCap

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.

Invesco SP MidCap

Risk-Adjusted Performance

13 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Invesco SP MidCap are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak technical indicators, Invesco SP may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Caterpillar and Invesco SP

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

The idea behind Caterpillar and Invesco SP MidCap 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.