Correlation Between Caterpillar and Legg Mason
Can any of the company-specific risk be diversified away by investing in both Caterpillar and Legg Mason 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 Legg Mason into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Caterpillar and Legg Mason Partners, you can compare the effects of market volatilities on Caterpillar and Legg Mason 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 Legg Mason. Check out your portfolio center. Please also check ongoing floating volatility patterns of Caterpillar and Legg Mason.
Diversification Opportunities for Caterpillar and Legg Mason
0.85 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Caterpillar and Legg is 0.85. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Legg Mason Partners in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Legg Mason Partners 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 Legg Mason. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Legg Mason Partners has no effect on the direction of Caterpillar i.e., Caterpillar and Legg Mason go up and down completely randomly.
Pair Corralation between Caterpillar and Legg Mason
Considering the 90-day investment horizon Caterpillar is expected to generate 1.49 times more return on investment than Legg Mason. However, Caterpillar is 1.49 times more volatile than Legg Mason Partners. It trades about 0.08 of its potential returns per unit of risk. Legg Mason Partners is currently generating about 0.06 per unit of risk. If you would invest 22,477 in Caterpillar on September 1, 2024 and sell it today you would earn a total of 18,134 from holding Caterpillar or generate 80.68% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Strong |
| Accuracy | 99.8% |
| Values | Daily Returns |
Caterpillar vs. Legg Mason Partners
Performance |
| Timeline |
| Caterpillar |
| Legg Mason Partners |
Caterpillar and Legg Mason Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Caterpillar and Legg Mason
The main advantage of trading using opposite Caterpillar and Legg Mason positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar position performs unexpectedly, Legg Mason 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 Legg Mason will offset losses from the drop in Legg Mason's long position.| Caterpillar vs. AGCO Corporation | Caterpillar vs. Nikola Corp | Caterpillar vs. PACCAR Inc | Caterpillar vs. Deere Company |
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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 Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.
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