Correlation Between Caterpillar and Microsoft
Can any of the company-specific risk be diversified away by investing in both Caterpillar and Microsoft 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 Microsoft into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Caterpillar and Microsoft, you can compare the effects of market volatilities on Caterpillar and Microsoft 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 Microsoft. Check out your portfolio center. Please also check ongoing floating volatility patterns of Caterpillar and Microsoft.
Diversification Opportunities for Caterpillar and Microsoft
0.84 | Correlation Coefficient |
Very poor diversification
The 3 months correlation between Caterpillar and Microsoft is 0.84. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Microsoft in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Microsoft 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 Microsoft. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Microsoft has no effect on the direction of Caterpillar i.e., Caterpillar and Microsoft go up and down completely randomly.
Pair Corralation between Caterpillar and Microsoft
Considering the 90-day investment horizon Caterpillar is expected to generate 0.83 times more return on investment than Microsoft. However, Caterpillar is 1.2 times less risky than Microsoft. It trades about 0.46 of its potential returns per unit of risk. Microsoft is currently generating about 0.11 per unit of risk. If you would invest 32,763 in Caterpillar on December 29, 2023 and sell it today you would earn a total of 3,880 from holding Caterpillar or generate 11.84% return on investment over 90 days.
Time Period | 3 Months [change] |
Direction | Moves Together |
Strength | Strong |
Accuracy | 100.0% |
Values | Daily Returns |
Caterpillar vs. Microsoft
Performance |
Timeline |
Caterpillar |
Microsoft |
Caterpillar and Microsoft Volatility Contrast
Predicted Return Density |
Returns |
Pair Trading with Caterpillar and Microsoft
The main advantage of trading using opposite Caterpillar and Microsoft positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar position performs unexpectedly, Microsoft 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 Microsoft will offset losses from the drop in Microsoft's long position.Caterpillar vs. Deere Company | Caterpillar vs. Hyster Yale Materials Handling | Caterpillar vs. Lion Electric Corp | Caterpillar vs. Titan International |
Microsoft vs. Global Blue Group | Microsoft vs. Aurora Mobile | Microsoft vs. Marqeta | Microsoft vs. Nextnav Acquisition Corp |
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 Fundamental Analysis module to view fundamental data based on most recent published financial statements.
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