Correlation Between CarMax and Caterpillar

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

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

Diversification Opportunities for CarMax and Caterpillar

0.55

Correlation Coefficient

CarMax  Caterpillar

Very weak diversification

The 3 months correlation between CarMax and Caterpillar is 0.55. Overlapping area represents the amount of risk that can be diversified away by holding CarMax Inc and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and CarMax 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 CarMax Inc 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 CarMax i.e., CarMax and Caterpillar go up and down completely randomly.

Pair Corralation between CarMax and Caterpillar

Considering the 90-day investment horizon CarMax is expected to generate 2.33 times less return on investment than Caterpillar. In addition to that, CarMax is 1.6 times more volatile than Caterpillar. It trades about 0.06 of its total potential returns per unit of risk. Caterpillar is currently generating about 0.23 per unit of volatility. If you would invest  24,017  in Caterpillar on January 26, 2024 and sell it today you would earn a total of  12,335  from holding Caterpillar or generate 51.36% return on investment over 90 days.

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

CarMax Inc  vs.  Caterpillar

CarMax Inc

Risk-Adjusted Performance

1 of 100

Weak

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

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

Pair Trading with CarMax and Caterpillar

The main advantage of trading using opposite CarMax and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if CarMax 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 CarMax Inc 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 Pattern Recognition module to use different Pattern Recognition models to time the market across multiple global exchanges.