Correlation Between Caterpillar and Deere

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

Diversification Opportunities for Caterpillar and Deere

0.79
  Correlation Coefficient

Poor diversification

The 3 months correlation between Caterpillar and Deere is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Deere Company in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Deere Company 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 Deere. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Deere Company has no effect on the direction of Caterpillar i.e., Caterpillar and Deere go up and down completely randomly.

Pair Corralation between Caterpillar and Deere

Assuming the 90 days trading horizon Caterpillar is expected to generate 1.11 times more return on investment than Deere. However, Caterpillar is 1.11 times more volatile than Deere Company. It trades about 0.13 of its potential returns per unit of risk. Deere Company is currently generating about 0.09 per unit of risk. If you would invest  23,492  in Caterpillar on September 2, 2024 and sell it today you would earn a total of  15,258  from holding Caterpillar or generate 64.95% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Caterpillar  vs.  Deere Company

 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 rather fragile basic indicators, Caterpillar exhibited solid returns over the last few months and may actually be approaching a breakup point.
Deere Company 

Risk-Adjusted Performance

19 of 100

 
Weak
 
Strong
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Deere Company are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unsteady basic indicators, Deere unveiled solid returns over the last few months and may actually be approaching a breakup point.

Caterpillar and Deere Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Caterpillar and Deere

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

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