Correlation Between Apple and Caterpillar

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

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

Diversification Opportunities for Apple and Caterpillar

-0.85

Correlation Coefficient

Apple  Caterpillar

Pay attention - limited upside

The 3 months correlation between Apple and Caterpillar is -0.85. Overlapping area represents the amount of risk that can be diversified away by holding Apple Inc and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Apple 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 Apple 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 Apple i.e., Apple and Caterpillar go up and down completely randomly.

Pair Corralation between Apple and Caterpillar

Given the investment horizon of 90 days Apple is expected to generate 3.53 times less return on investment than Caterpillar. But when comparing it to its historical volatility, Apple Inc is 1.07 times less risky than Caterpillar. It trades about 0.02 of its potential returns per unit of risk. Caterpillar is currently generating about 0.07 of returns per unit of risk over similar time horizon. If you would invest  20,588  in Caterpillar on January 17, 2024 and sell it today you would earn a total of  15,803  from holding Caterpillar or generate 76.76% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Against
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

Apple Inc  vs.  Caterpillar

Apple Inc

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Apple Inc has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, Apple is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

Caterpillar

Risk-Adjusted Performance

25 of 100

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 25 (%) 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.

Pair Trading with Apple and Caterpillar

The main advantage of trading using opposite Apple and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Apple 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 Apple 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 Price Transformation module to use Price Transformation models to analyze the depth of different equity instruments across global markets.