Correlation Between ABM Industries and Caterpillar

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

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

Diversification Opportunities for ABM Industries and Caterpillar

0.74

Correlation Coefficient

ABM Industries  Caterpillar

Poor diversification

The 3 months correlation between ABM and Caterpillar is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding ABM Industries Incorporated and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and ABM Industries 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 ABM Industries Incorporated 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 ABM Industries i.e., ABM Industries and Caterpillar go up and down completely randomly.

Pair Corralation between ABM Industries and Caterpillar

Considering the 90-day investment horizon ABM Industries is expected to generate 9.77 times less return on investment than Caterpillar. In addition to that, ABM Industries is 1.11 times more volatile than Caterpillar. It trades about 0.01 of its total potential returns per unit of risk. Caterpillar is currently generating about 0.06 per unit of volatility. If you would invest  21,340  in Caterpillar on January 24, 2024 and sell it today you would earn a total of  14,421  from holding Caterpillar or generate 67.58% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	99.8%
Values	Daily Returns

ABM Industries Incorporated  vs.  Caterpillar

ABM Industries rporated

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in ABM Industries Incorporated are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of very uncertain fundamental drivers, ABM Industries may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Caterpillar

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 21 (%) 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 ABM Industries and Caterpillar

The main advantage of trading using opposite ABM Industries and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if ABM Industries 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 ABM Industries Incorporated 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 Portfolio Manager module to state of the art Portfolio Manager to monitor and improve performance of your invested capital.