Correlation Between Caterpillar and Metso Outotec

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

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

Diversification Opportunities for Caterpillar and Metso Outotec

-0.41

Correlation Coefficient

Caterpillar  Metso Outotec

Very good diversification

The 3 months correlation between Caterpillar and Metso is -0.41. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Metso Outotec Oyj in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Metso Outotec Oyj 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 Metso Outotec. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Metso Outotec Oyj has no effect on the direction of Caterpillar i.e., Caterpillar and Metso Outotec go up and down completely randomly.

Pair Corralation between Caterpillar and Metso Outotec

Assuming the 90 days trading horizon Caterpillar is expected to generate 1.11 times less return on investment than Metso Outotec. But when comparing it to its historical volatility, Caterpillar is 1.01 times less risky than Metso Outotec. It trades about 0.05 of its potential returns per unit of risk. Metso Outotec Oyj is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  841.00  in Metso Outotec Oyj on September 23, 2024 and sell it today you would earn a total of  45.00  from holding Metso Outotec Oyj or generate 5.35% return on investment over 90 days.

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

Caterpillar  vs.  Metso Outotec Oyj

Caterpillar

Risk-Adjusted Performance

3 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. In spite of rather sound basic indicators, Caterpillar is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Metso Outotec Oyj

Risk-Adjusted Performance

4 of 100

Insignificant

Compared to the overall equity markets, risk-adjusted returns on investments in Metso Outotec Oyj are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable basic indicators, Metso Outotec is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Caterpillar and Metso Outotec

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

The idea behind Caterpillar and Metso Outotec Oyj 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..