Correlation Between Caterpillar and Prudential High

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

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

Diversification Opportunities for Caterpillar and Prudential High

0.8

Correlation Coefficient

Caterpillar  Prudential High

Very poor diversification

The 3 months correlation between Caterpillar and Prudential is 0.8. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Prudential High Yield in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Prudential High Yield 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 Prudential High. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Prudential High Yield has no effect on the direction of Caterpillar i.e., Caterpillar and Prudential High go up and down completely randomly.

Pair Corralation between Caterpillar and Prudential High

Considering the 90-day investment horizon Caterpillar is expected to generate 5.5 times more return on investment than Prudential High. However, Caterpillar is 5.5 times more volatile than Prudential High Yield. It trades about 0.02 of its potential returns per unit of risk. Prudential High Yield is currently generating about -0.26 per unit of risk. If you would invest  35,645  in Caterpillar on January 20, 2024 and sell it today you would earn a total of  148.00  from holding Caterpillar or generate 0.42% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Strong
Accuracy	95.45%
Values	Daily Returns

Caterpillar  vs.  Prudential High Yield

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.

Prudential High Yield

Risk-Adjusted Performance

1 of 100

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in Prudential High Yield are ranked lower than 1 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Prudential High is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Caterpillar and Prudential High

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

The idea behind Caterpillar and Prudential High Yield 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 Idea Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.