Correlation Between Caterpillar and Desktop Metal

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

Diversification Opportunities for Caterpillar and Desktop Metal

-0.65
  Correlation Coefficient

Excellent diversification

The 3 months correlation between Caterpillar and Desktop is -0.65. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Desktop Metal in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Desktop Metal 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 Desktop Metal. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Desktop Metal has no effect on the direction of Caterpillar i.e., Caterpillar and Desktop Metal go up and down completely randomly.

Pair Corralation between Caterpillar and Desktop Metal

Considering the 90-day investment horizon Caterpillar is expected to generate 0.35 times more return on investment than Desktop Metal. However, Caterpillar is 2.87 times less risky than Desktop Metal. It trades about 0.07 of its potential returns per unit of risk. Desktop Metal is currently generating about -0.09 per unit of risk. If you would invest  25,398  in Caterpillar on December 1, 2023 and sell it today you would earn a total of  7,558  from holding Caterpillar or generate 29.76% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthWeak
Accuracy100.0%
ValuesDaily Returns

Caterpillar  vs.  Desktop Metal

 Performance 
       Timeline  
Caterpillar 

Risk-Adjusted Performance

22 of 100

 
Low
 
High
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 22 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unsteady basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.
Desktop Metal 

Risk-Adjusted Performance

0 of 100

 
Low
 
High
Very Weak
Over the last 90 days Desktop Metal has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest inconsistent performance, the Stock's primary indicators remain healthy and the recent disarray on Wall Street may also be a sign of long period gains for the firm investors.

Caterpillar and Desktop Metal Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Caterpillar and Desktop Metal

The main advantage of trading using opposite Caterpillar and Desktop Metal positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar position performs unexpectedly, Desktop Metal 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 Desktop Metal will offset losses from the drop in Desktop Metal's long position.
The idea behind Caterpillar and Desktop Metal 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 Premium Stories module to follow Macroaxis premium stories from verified contributors across different equity types, categories and coverage scope.

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