Correlation Between Caterpillar and Six Flags

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

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

Diversification Opportunities for Caterpillar and Six Flags

0.08

Correlation Coefficient

Caterpillar  Six Flags

Significant diversification

The 3 months correlation between Caterpillar and Six is 0.08. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Six Flags Entertainment in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Six Flags Entertainment 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 Six Flags. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Six Flags Entertainment has no effect on the direction of Caterpillar i.e., Caterpillar and Six Flags go up and down completely randomly.

Pair Corralation between Caterpillar and Six Flags

Considering the 90-day investment horizon Caterpillar is expected to generate 0.62 times more return on investment than Six Flags. However, Caterpillar is 1.6 times less risky than Six Flags. It trades about 0.14 of its potential returns per unit of risk. Six Flags Entertainment is currently generating about 0.01 per unit of risk. If you would invest  21,331  in Caterpillar on January 25, 2024 and sell it today you would earn a total of  14,994  from holding Caterpillar or generate 70.29% return on investment over 90 days.

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

Caterpillar  vs.  Six Flags Entertainment

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 unfluctuating basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.

Six Flags Entertainment

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Six Flags Entertainment has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly strong forward indicators, Six Flags is not utilizing all of its potentials. The newest stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Caterpillar and Six Flags

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

The idea behind Caterpillar and Six Flags Entertainment 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 Risk-Return Analysis module to view associations between returns expected from investment and the risk you assume.