Correlation Between Caterpillar and Farmhouse
Can any of the company-specific risk be diversified away by investing in both Caterpillar and Farmhouse 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 Farmhouse into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Caterpillar and Farmhouse, you can compare the effects of market volatilities on Caterpillar and Farmhouse 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 Farmhouse. Check out your portfolio center. Please also check ongoing floating volatility patterns of Caterpillar and Farmhouse.
Diversification Opportunities for Caterpillar and Farmhouse
-0.44 | Correlation Coefficient |
Very good diversification
The 3 months correlation between Caterpillar and Farmhouse is -0.44. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Farmhouse in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Farmhouse 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 Farmhouse. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Farmhouse has no effect on the direction of Caterpillar i.e., Caterpillar and Farmhouse go up and down completely randomly.
Pair Corralation between Caterpillar and Farmhouse
Considering the 90-day investment horizon Caterpillar is expected to generate 5.98 times less return on investment than Farmhouse. But when comparing it to its historical volatility, Caterpillar is 4.08 times less risky than Farmhouse. It trades about 0.16 of its potential returns per unit of risk. Farmhouse is currently generating about 0.24 of returns per unit of risk over similar time horizon. If you would invest 14.00 in Farmhouse on September 1, 2024 and sell it today you would earn a total of 8.00 from holding Farmhouse or generate 57.14% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Against |
| Strength | Very Weak |
| Accuracy | 91.3% |
| Values | Daily Returns |
Caterpillar vs. Farmhouse
Performance |
| Timeline |
| Caterpillar |
| Farmhouse |
Caterpillar and Farmhouse Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Caterpillar and Farmhouse
The main advantage of trading using opposite Caterpillar and Farmhouse positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar position performs unexpectedly, Farmhouse 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 Farmhouse will offset losses from the drop in Farmhouse's long position.| Caterpillar vs. AGCO Corporation | Caterpillar vs. Nikola Corp | Caterpillar vs. PACCAR Inc | Caterpillar vs. Deere Company |
| Farmhouse vs. Powerstorm Holdings | Farmhouse vs. Phonex Inc | Farmhouse vs. Greystone Logistics | Farmhouse vs. Fortran Corp |
Check out your portfolio center.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 Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.
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