Correlation Between Caterpillar and Procter Gamble

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

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

Diversification Opportunities for Caterpillar and Procter Gamble

0.42

Correlation Coefficient

Caterpillar  Procter Gamble

Very weak diversification

The 3 months correlation between Caterpillar and Procter is 0.42. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Procter Gamble in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Procter Gamble 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 Procter Gamble. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Procter Gamble has no effect on the direction of Caterpillar i.e., Caterpillar and Procter Gamble go up and down completely randomly.

Pair Corralation between Caterpillar and Procter Gamble

Considering the 90-day investment horizon Caterpillar is expected to generate 1.93 times more return on investment than Procter Gamble. However, Caterpillar is 1.93 times more volatile than Procter Gamble. It trades about 0.25 of its potential returns per unit of risk. Procter Gamble is currently generating about 0.12 per unit of risk. If you would invest  29,834  in Caterpillar on January 26, 2024 and sell it today you would earn a total of  6,518  from holding Caterpillar or generate 21.85% return on investment over 90 days.

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

Caterpillar  vs.  Procter Gamble

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.

Procter Gamble

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Procter Gamble are ranked lower than 9 (%) of all global equities and portfolios over the last 90 days. Despite nearly stable technical and fundamental indicators, Procter Gamble is not utilizing all of its potentials. The latest stock price disturbance, may contribute to mid-run losses for the stockholders.

Pair Trading with Caterpillar and Procter Gamble

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

The idea behind Caterpillar and Procter Gamble 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 AI Investment Finder module to use AI to screen and filter profitable investment opportunities.