Correlation Between VOLVO B and Caterpillar

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

By analyzing existing cross correlation between VOLVO B UNSPADR and Caterpillar, you can compare the effects of market volatilities on VOLVO B and Caterpillar 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 VOLVO B with a short position of Caterpillar. Check out your portfolio center. Please also check ongoing floating volatility patterns of VOLVO B and Caterpillar.

Diversification Opportunities for VOLVO B and Caterpillar

0.24

Correlation Coefficient

VOLVO B  Caterpillar

Modest diversification

The 3 months correlation between VOLVO and Caterpillar is 0.24. Overlapping area represents the amount of risk that can be diversified away by holding VOLVO B UNSPADR and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and VOLVO B 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 VOLVO B UNSPADR are associated (or correlated) with Caterpillar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Caterpillar has no effect on the direction of VOLVO B i.e., VOLVO B and Caterpillar go up and down completely randomly.

Pair Corralation between VOLVO B and Caterpillar

Assuming the 90 days trading horizon VOLVO B is expected to generate 5.49 times less return on investment than Caterpillar. But when comparing it to its historical volatility, VOLVO B UNSPADR is 1.03 times less risky than Caterpillar. It trades about 0.01 of its potential returns per unit of risk. Caterpillar is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  33,170  in Caterpillar on September 23, 2024 and sell it today you would earn a total of  1,580  from holding Caterpillar or generate 4.76% return on investment over 90 days.

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

VOLVO B UNSPADR  vs.  Caterpillar

VOLVO B UNSPADR

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days VOLVO B UNSPADR has generated negative risk-adjusted returns adding no value to investors with long positions. Despite nearly stable essential indicators, VOLVO B is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

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.

Pair Trading with VOLVO B and Caterpillar

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

The idea behind VOLVO B UNSPADR and Caterpillar 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 Suggestion module to get suggestions outside of your existing asset allocation including your own model portfolios.