Correlation Between Caterpillar and Omnicom

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

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

Diversification Opportunities for Caterpillar and Omnicom

0.7

Correlation Coefficient

Caterpillar  Omnicom

Poor diversification

The 3 months correlation between Caterpillar and Omnicom is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Omnicom Group in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Omnicom Group 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 Omnicom. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Omnicom Group has no effect on the direction of Caterpillar i.e., Caterpillar and Omnicom go up and down completely randomly.

Pair Corralation between Caterpillar and Omnicom

Considering the 90-day investment horizon Caterpillar is expected to generate 1.42 times less return on investment than Omnicom. But when comparing it to its historical volatility, Caterpillar is 1.03 times less risky than Omnicom. It trades about 0.09 of its potential returns per unit of risk. Omnicom Group is currently generating about 0.13 of returns per unit of risk over similar time horizon. If you would invest  9,278  in Omnicom Group on January 26, 2024 and sell it today you would earn a total of  320.00  from holding Omnicom Group or generate 3.45% return on investment over 90 days.

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

Caterpillar  vs.  Omnicom Group

Caterpillar

Risk-Adjusted Performance

19 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 19 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.

Omnicom Group

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Omnicom Group are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. In spite of rather weak primary indicators, Omnicom may actually be approaching a critical reversion point that can send shares even higher in May 2024.

Pair Trading with Caterpillar and Omnicom

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

The idea behind Caterpillar and Omnicom Group 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 Headlines Timeline module to stay connected to all market stories and filter out noise. Drill down to analyze hype elasticity.