Correlation Between Caterpillar and AB Volvo

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

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

Diversification Opportunities for Caterpillar and AB Volvo

0.62

Correlation Coefficient

Caterpillar  AB Volvo

Poor diversification

The 3 months correlation between Caterpillar and VOL1 is 0.62. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and AB Volvo in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on AB Volvo 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 AB Volvo. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of AB Volvo has no effect on the direction of Caterpillar i.e., Caterpillar and AB Volvo go up and down completely randomly.

Pair Corralation between Caterpillar and AB Volvo

Assuming the 90 days trading horizon Caterpillar is expected to generate 1.59 times less return on investment than AB Volvo. But when comparing it to its historical volatility, Caterpillar is 1.91 times less risky than AB Volvo. It trades about 0.1 of its potential returns per unit of risk. AB Volvo is currently generating about 0.08 of returns per unit of risk over similar time horizon. If you would invest  1,444  in AB Volvo on September 12, 2024 and sell it today you would earn a total of  1,056  from holding AB Volvo or generate 73.13% return on investment over 90 days.

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

Caterpillar  vs.  AB Volvo

Caterpillar

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of rather fragile basic indicators, Caterpillar exhibited solid returns over the last few months and may actually be approaching a breakup point.

AB Volvo

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in AB Volvo are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly fragile essential indicators, AB Volvo may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Caterpillar and AB Volvo

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

The idea behind Caterpillar and AB Volvo 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 Alpha Finder module to use alpha and beta coefficients to find investment opportunities after accounting for the risk.