Correlation Between Home Depot and Caterpillar

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

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

Diversification Opportunities for Home Depot and Caterpillar

0.24

Correlation Coefficient

Home Depot  Caterpillar

Modest diversification

The 3 months correlation between Home and Caterpillar is 0.24. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Home Depot 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 Home Depot 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 Home Depot i.e., Home Depot and Caterpillar go up and down completely randomly.

Pair Corralation between Home Depot and Caterpillar

Allowing for the 90-day total investment horizon Home Depot is expected to under-perform the Caterpillar. In addition to that, Home Depot is 1.04 times more volatile than Caterpillar. It trades about -0.42 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	Very Weak
Accuracy	100.0%
Values	Daily Returns

Home Depot  vs.  Caterpillar

Home Depot

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Home Depot has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound fundamental indicators, Home Depot is not utilizing all of its potentials. The newest stock price tumult, may contribute to shorter-term losses for the shareholders.

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 Home Depot and Caterpillar

The main advantage of trading using opposite Home Depot and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Home Depot 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 Home Depot 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.

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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 Theme Ratings module to determine theme ratings based on digital equity recommendations. Macroaxis theme ratings are based on combination of fundamental analysis and risk-adjusted market performance.