Correlation Between Caterpillar and Johnson Johnson

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

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

Diversification Opportunities for Caterpillar and Johnson Johnson

-0.6

Correlation Coefficient

Caterpillar  Johnson Johnson

Excellent diversification

The 3 months correlation between Caterpillar and Johnson is -0.6. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Johnson Johnson in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Johnson Johnson 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 Johnson Johnson. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Johnson Johnson has no effect on the direction of Caterpillar i.e., Caterpillar and Johnson Johnson go up and down completely randomly.

Pair Corralation between Caterpillar and Johnson Johnson

Considering the 90-day investment horizon Caterpillar is expected to generate 1.87 times more return on investment than Johnson Johnson. However, Caterpillar is 1.87 times more volatile than Johnson Johnson. It trades about 0.07 of its potential returns per unit of risk. Johnson Johnson is currently generating about -0.03 per unit of risk. If you would invest  20,769  in Caterpillar on January 20, 2024 and sell it today you would earn a total of  15,024  from holding Caterpillar or generate 72.34% return on investment over 90 days.

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

Caterpillar  vs.  Johnson Johnson

Caterpillar

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 20 (%) 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.

Johnson Johnson

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Johnson Johnson has generated negative risk-adjusted returns adding no value to investors with long positions. Even with latest uncertain performance, the Stock's basic indicators remain steady and the new chaos on Wall Street may also be a sign of medium-term gains for the company stakeholders.

Pair Trading with Caterpillar and Johnson Johnson

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

The idea behind Caterpillar and Johnson Johnson 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.