Correlation Between Financial Select and Caterpillar
Can any of the company-specific risk be diversified away by investing in both Financial Select and Caterpillar 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 Financial Select and Caterpillar into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Financial Select Sector and Caterpillar, you can compare the effects of market volatilities on Financial Select and Caterpillar 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 Financial Select with a short position of Caterpillar. Check out your portfolio center. Please also check ongoing floating volatility patterns of Financial Select and Caterpillar.
Diversification Opportunities for Financial Select and Caterpillar
0.72 | Correlation Coefficient |
Poor diversification
The 3 months correlation between Financial and Caterpillar is 0.72. Overlapping area represents the amount of risk that can be diversified away by holding Financial Select Sector and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Financial Select 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 Financial Select Sector are associated (or correlated) with Caterpillar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Caterpillar has no effect on the direction of Financial Select i.e., Financial Select and Caterpillar go up and down completely randomly.
Pair Corralation between Financial Select and Caterpillar
Considering the 90-day investment horizon Financial Select is expected to generate 1.63 times less return on investment than Caterpillar. But when comparing it to its historical volatility, Financial Select Sector is 2.33 times less risky than Caterpillar. It trades about 0.15 of its potential returns per unit of risk. Caterpillar is currently generating about 0.11 of returns per unit of risk over similar time horizon. If you would invest 32,046 in Caterpillar on February 12, 2024 and sell it today you would earn a total of 3,433 from holding Caterpillar or generate 10.71% return on investment over 90 days.
| Time Period | 3 Months [change] |
| Direction | Moves Together |
| Strength | Significant |
| Accuracy | 98.46% |
| Values | Daily Returns |
Financial Select Sector vs. Caterpillar
Performance |
| Timeline |
| Financial Select Sector |
| Caterpillar |
Financial Select and Caterpillar Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with Financial Select and Caterpillar
The main advantage of trading using opposite Financial Select and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Financial Select position performs unexpectedly, Caterpillar 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 Caterpillar will offset losses from the drop in Caterpillar's long position.| Financial Select vs. SPDR SP Retail | Financial Select vs. SPDR SP Homebuilders | Financial Select vs. SPDR SP Metals |
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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 ETFs module to find actively traded Exchange Traded Funds (ETF) from around the world.
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