# Correlation Between Caterpillar and Insmed

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

## Diversification Opportunities for Caterpillar and Insmed

 0.4 Correlation Coefficient

### Very weak diversification

The 3 months correlation between Caterpillar and Insmed is 0.4. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Insmed Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Insmed Inc 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 Insmed. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Insmed Inc has no effect on the direction of Caterpillar i.e., Caterpillar and Insmed go up and down completely randomly.

## Pair Corralation between Caterpillar and Insmed

Considering the 90-day investment horizon Caterpillar is expected to generate 0.67 times more return on investment than Insmed. However, Caterpillar is 1.48 times less risky than Insmed. It trades about 0.15 of its potential returns per unit of risk. Insmed Inc is currently generating about 0.07 per unit of risk. If you would invest  26,503  in Caterpillar on December 3, 2023 and sell it today you would earn a total of  7,167  from holding Caterpillar or generate 27.04% return on investment over 90 days.
 Time Period 3 Months [change] Direction Moves Together Strength Weak Accuracy 99.04% Values Daily Returns

## Caterpillar  vs.  Insmed Inc

 Performance
 Timeline
 Caterpillar Correlation Profile

### 24 of 100

 Low High
Solid
Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 24 (%) 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.
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 Insmed Inc Correlation Profile

### 2 of 100

 Low High
Weak
Compared to the overall equity markets, risk-adjusted returns on investments in Insmed Inc are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Insmed is not utilizing all of its potentials. The latest stock price disarray, may contribute to short-term losses for the investors.
 Performance Backtest Predict

## Caterpillar and Insmed Volatility Contrast

 Predicted Return Density
 Returns

## Pair Trading with Caterpillar and Insmed

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