Correlation Between Caterpillar and PACCAR

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

Diversification Opportunities for Caterpillar and PACCAR

0.98
  Correlation Coefficient

Almost no diversification

The 3 months correlation between Caterpillar and PACCAR is 0.98. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and PACCAR Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on PACCAR 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 PACCAR. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of PACCAR Inc has no effect on the direction of Caterpillar i.e., Caterpillar and PACCAR go up and down completely randomly.

Pair Corralation between Caterpillar and PACCAR

Considering the 90-day investment horizon Caterpillar is expected to generate 1.04 times less return on investment than PACCAR. In addition to that, Caterpillar is 1.0 times more volatile than PACCAR Inc. It trades about 0.45 of its total potential returns per unit of risk. PACCAR Inc is currently generating about 0.47 per unit of volatility. If you would invest  11,133  in PACCAR Inc on December 29, 2023 and sell it today you would earn a total of  1,313  from holding PACCAR Inc or generate 11.79% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy100.0%
ValuesDaily Returns

Caterpillar  vs.  PACCAR Inc

 Performance 
       Timeline  
Caterpillar 

Risk-Adjusted Performance

20 of 100

 
Low
 
High
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 unsteady basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.
PACCAR Inc 

Risk-Adjusted Performance

28 of 100

 
Low
 
High
Strong
Compared to the overall equity markets, risk-adjusted returns on investments in PACCAR Inc are ranked lower than 28 (%) of all global equities and portfolios over the last 90 days. Even with relatively unsteady basic indicators, PACCAR reported solid returns over the last few months and may actually be approaching a breakup point.

Caterpillar and PACCAR Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Caterpillar and PACCAR

The main advantage of trading using opposite Caterpillar and PACCAR positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar position performs unexpectedly, PACCAR 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 PACCAR will offset losses from the drop in PACCAR's long position.
The idea behind Caterpillar and PACCAR 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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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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.

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