Correlation Between Ford and Caterpillar

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

By analyzing existing cross correlation between Ford Motor and Caterpillar, you can compare the effects of market volatilities on Ford and Caterpillar 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 Ford with a short position of Caterpillar. Check out your portfolio center. Please also check ongoing floating volatility patterns of Ford and Caterpillar.

Diversification Opportunities for Ford and Caterpillar

0.87

Correlation Coefficient

Ford  Caterpillar

Very poor diversification

The 3 months correlation between Ford and Caterpillar is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Ford Motor and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Ford 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 Ford Motor are associated (or correlated) with Caterpillar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Caterpillar has no effect on the direction of Ford i.e., Ford and Caterpillar go up and down completely randomly.

Pair Corralation between Ford and Caterpillar

Taking into account the 90-day investment horizon Ford Motor is expected to under-perform the Caterpillar. In addition to that, Ford is 1.51 times more volatile than Caterpillar. It trades about -0.12 of its total potential returns per unit of risk. Caterpillar is currently generating about -0.01 per unit of volatility. If you would invest  35,645  in Caterpillar on January 20, 2024 and sell it today you would lose (179.00) from holding Caterpillar or give up 0.5% of portfolio value over 90 days.

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

Ford Motor  vs.  Caterpillar

Ford Motor

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Ford Motor are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Despite nearly unfluctuating technical and fundamental indicators, Ford may actually be approaching a critical reversion point that can send shares even higher in May 2024.

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.

Pair Trading with Ford and Caterpillar

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

The idea behind Ford Motor and Caterpillar 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 Correlation Analysis module to reduce portfolio risk simply by holding instruments which are not perfectly correlated.