Correlation Between Caterpillar and Take-Two Interactive

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

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

Diversification Opportunities for Caterpillar and Take-Two Interactive

0.71

Correlation Coefficient

Caterpillar  Take-Two Interactive

Poor diversification

The 3 months correlation between Caterpillar and Take-Two is 0.71. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Take Two Interactive Software in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Take Two Interactive 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 Take-Two Interactive. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Take Two Interactive has no effect on the direction of Caterpillar i.e., Caterpillar and Take-Two Interactive go up and down completely randomly.

Pair Corralation between Caterpillar and Take-Two Interactive

Assuming the 90 days trading horizon Caterpillar is expected to generate 1.65 times less return on investment than Take-Two Interactive. In addition to that, Caterpillar is 1.31 times more volatile than Take Two Interactive Software. It trades about 0.15 of its total potential returns per unit of risk. Take Two Interactive Software is currently generating about 0.32 per unit of volatility. If you would invest  13,572  in Take Two Interactive Software on September 14, 2024 and sell it today you would earn a total of  4,508  from holding Take Two Interactive Software or generate 33.22% return on investment over 90 days.

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

Caterpillar  vs.  Take Two Interactive Software

Caterpillar

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 11 (%) of all global equities and portfolios over the last 90 days. In spite of rather uncertain basic indicators, Caterpillar exhibited solid returns over the last few months and may actually be approaching a breakup point.

Take Two Interactive

Risk-Adjusted Performance

24 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Take Two Interactive Software are ranked lower than 24 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain basic indicators, Take-Two Interactive reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Caterpillar and Take-Two Interactive

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

The idea behind Caterpillar and Take Two Interactive Software 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.