Correlation Between HP and Caterpillar

Can any of the company-specific risk be diversified away by investing in both HP 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 HP and Caterpillar into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between HP Inc and Caterpillar, you can compare the effects of market volatilities on HP 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 HP with a short position of Caterpillar. Check out your portfolio center. Please also check ongoing floating volatility patterns of HP and Caterpillar.

Diversification Opportunities for HP and Caterpillar

0.26

Correlation Coefficient

HP  Caterpillar

Modest diversification

The 3 months correlation between HP and Caterpillar is 0.26. Overlapping area represents the amount of risk that can be diversified away by holding HP Inc and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and HP 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 HP Inc 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 HP i.e., HP and Caterpillar go up and down completely randomly.

Pair Corralation between HP and Caterpillar

Considering the 90-day investment horizon HP Inc is expected to under-perform the Caterpillar. But the stock apears to be less risky and, when comparing its historical volatility, HP Inc is 1.56 times less risky than Caterpillar. The stock trades about -0.28 of its potential returns per unit of risk. The Caterpillar is currently generating about -0.17 of returns per unit of risk over similar time horizon. If you would invest  36,242  in Caterpillar on February 1, 2024 and sell it today you would lose (3,135) from holding Caterpillar or give up 8.65% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Very Weak
Accuracy	100.0%
Values	Daily Returns

HP Inc  vs.  Caterpillar

HP Inc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days HP Inc has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively invariable basic indicators, HP is not utilizing all of its potentials. The current stock price agitation, may contribute to short-term losses for the retail investors.

Caterpillar

Risk-Adjusted Performance

7 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 7 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating basic indicators, Caterpillar may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with HP and Caterpillar

The main advantage of trading using opposite HP and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if HP 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.

The idea behind HP Inc and Caterpillar 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 Bond Analysis module to evaluate and analyze corporate bonds as a potential investment for your portfolios..