Correlation Between Caterpillar and GE Aerospace

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

By analyzing existing cross correlation between Caterpillar and GE Aerospace, you can compare the effects of market volatilities on Caterpillar and GE Aerospace 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 GE Aerospace. Check out your portfolio center. Please also check ongoing floating volatility patterns of Caterpillar and GE Aerospace.

Diversification Opportunities for Caterpillar and GE Aerospace

0.96

Correlation Coefficient

Caterpillar  GE Aerospace

Almost no diversification

The 3 months correlation between Caterpillar and GE Aerospace is 0.96. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and GE Aerospace in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on GE Aerospace 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 GE Aerospace. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of GE Aerospace has no effect on the direction of Caterpillar i.e., Caterpillar and GE Aerospace go up and down completely randomly.

Pair Corralation between Caterpillar and GE Aerospace

Considering the 90-day investment horizon Caterpillar is expected to generate 1.88 times less return on investment than GE Aerospace. In addition to that, Caterpillar is 1.06 times more volatile than GE Aerospace. It trades about 0.07 of its total potential returns per unit of risk. GE Aerospace is currently generating about 0.14 per unit of volatility. If you would invest  4,825  in GE Aerospace on January 17, 2024 and sell it today you would earn a total of  10,545  from holding GE Aerospace or generate 218.55% return on investment over 90 days.

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

Caterpillar  vs.  GE Aerospace

Caterpillar

Risk-Adjusted Performance

26 of 100

Strong

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 26 (%) 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.

GE Aerospace

Risk-Adjusted Performance

31 of 100

Very Strong

Compared to the overall equity markets, risk-adjusted returns on investments in GE Aerospace are ranked lower than 31 (%) of all global equities and portfolios over the last 90 days. In spite of rather abnormal technical and fundamental indicators, GE Aerospace exhibited solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Caterpillar and GE Aerospace

The main advantage of trading using opposite Caterpillar and GE Aerospace positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar position performs unexpectedly, GE Aerospace 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 GE Aerospace will offset losses from the drop in GE Aerospace's long position.

The idea behind Caterpillar and GE Aerospace 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.

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 Portfolio Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.