Correlation Between Caterpillar and Morningstar Alternatives
Can any of the company-specific risk be diversified away by investing in both Caterpillar and Morningstar Alternatives 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 Morningstar Alternatives into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Caterpillar and Morningstar Alternatives, you can compare the effects of market volatilities on Caterpillar and Morningstar Alternatives 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 Morningstar Alternatives. Check out your portfolio center. Please also check ongoing floating volatility patterns of Caterpillar and Morningstar Alternatives.
Diversification Opportunities for Caterpillar and Morningstar Alternatives
0.89 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Caterpillar and Morningstar is 0.89. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Morningstar Alternatives in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Morningstar Alternatives 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 Morningstar Alternatives. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Morningstar Alternatives has no effect on the direction of Caterpillar i.e., Caterpillar and Morningstar Alternatives go up and down completely randomly.
Pair Corralation between Caterpillar and Morningstar Alternatives
Considering the 90-day investment horizon Caterpillar is expected to generate 20.01 times more return on investment than Morningstar Alternatives. However, Caterpillar is 20.01 times more volatile than Morningstar Alternatives. It trades about 0.08 of its potential returns per unit of risk. Morningstar Alternatives is currently generating about 0.22 per unit of risk. If you would invest 39,061 in Caterpillar on August 28, 2024 and sell it today you would earn a total of 1,504 from holding Caterpillar or generate 3.85% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 100.0% |
| Values | Daily Returns |
Caterpillar vs. Morningstar Alternatives
Performance |
| Timeline |
| Caterpillar |
| Morningstar Alternatives |
Caterpillar and Morningstar Alternatives Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Caterpillar and Morningstar Alternatives
The main advantage of trading using opposite Caterpillar and Morningstar Alternatives positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar position performs unexpectedly, Morningstar Alternatives 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 Morningstar Alternatives will offset losses from the drop in Morningstar Alternatives' long position.| Caterpillar vs. Lion Electric Corp | Caterpillar vs. Xos Inc | Caterpillar vs. Hydrofarm Holdings Group | Caterpillar vs. AGCO Corporation |
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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.
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