Correlation Between Caterpillar and DIGITAL

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Can any of the company-specific risk be diversified away by investing in both Caterpillar and DIGITAL 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 DIGITAL into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Caterpillar and DIGITAL RLTY TR, you can compare the effects of market volatilities on Caterpillar and DIGITAL 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 DIGITAL. Check out your portfolio center. Please also check ongoing floating volatility patterns of Caterpillar and DIGITAL.

Diversification Opportunities for Caterpillar and DIGITAL

-0.51
  Correlation Coefficient

Excellent diversification

The 3 months correlation between Caterpillar and DIGITAL is -0.51. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and DIGITAL RLTY TR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on DIGITAL RLTY TR 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 DIGITAL. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of DIGITAL RLTY TR has no effect on the direction of Caterpillar i.e., Caterpillar and DIGITAL go up and down completely randomly.

Pair Corralation between Caterpillar and DIGITAL

Considering the 90-day investment horizon Caterpillar is expected to generate 3.98 times more return on investment than DIGITAL. However, Caterpillar is 3.98 times more volatile than DIGITAL RLTY TR. It trades about 0.1 of its potential returns per unit of risk. DIGITAL RLTY TR is currently generating about -0.01 per unit of risk. If you would invest  32,883  in Caterpillar on September 1, 2024 and sell it today you would earn a total of  7,728  from holding Caterpillar or generate 23.5% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthVery Weak
Accuracy92.06%
ValuesDaily Returns

Caterpillar  vs.  DIGITAL RLTY TR

 Performance 
       Timeline  
Caterpillar 

Risk-Adjusted Performance

12 of 100

 
Weak
 
Strong
Good
Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.
DIGITAL RLTY TR 

Risk-Adjusted Performance

0 of 100

 
Weak
 
Strong
Very Weak
Over the last 90 days DIGITAL RLTY TR has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, DIGITAL is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Caterpillar and DIGITAL Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Caterpillar and DIGITAL

The main advantage of trading using opposite Caterpillar and DIGITAL positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar position performs unexpectedly, DIGITAL 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 DIGITAL will offset losses from the drop in DIGITAL's long position.
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The idea behind Caterpillar and DIGITAL RLTY TR 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.

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