Correlation Between First Trust and Caterpillar

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

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

Diversification Opportunities for First Trust and Caterpillar

Weak diversification

The 3 months correlation between First and Caterpillar is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding First Trust Nasdaq and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and First Trust 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 First Trust Nasdaq 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 First Trust i.e., First Trust and Caterpillar go up and down completely randomly.

Pair Corralation between First Trust and Caterpillar

Given the investment horizon of 90 days First Trust Nasdaq is expected to under-perform the Caterpillar. But the etf apears to be less risky and, when comparing its historical volatility, First Trust Nasdaq is 1.16 times less risky than Caterpillar. The etf trades about -0.06 of its potential returns per unit of risk. The Caterpillar is currently generating about 0.0 of returns per unit of risk over similar time horizon. If you would invest  27,303  in Caterpillar on June 24, 2023 and sell it today you would lose (12.00) from holding Caterpillar or give up 0.04% of portfolio value over 90 days.

First Trust Nasdaq  vs.  Caterpillar

First Trust Nasdaq

First Performance

1 of 100

Compared to the overall equity markets, risk-adjusted returns on investments in First Trust Nasdaq are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, First Trust is not utilizing all of its potentials. The newest stock price disarray, may contribute to short-term losses for the insiders.

Caterpillar

Caterpillar Performance

11 of 100

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 11 (%) 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.

Pair Trading with First Trust and Caterpillar

The main advantage of trading using opposite First Trust and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if First Trust 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 First Trust Nasdaq 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 Balance Of Power module to check stock momentum by analyzing Balance Of Power indicator and other technical ratios.