Correlation Between Coca Cola and Caterpillar

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

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

Diversification Opportunities for Coca Cola and Caterpillar

0.03

Correlation Coefficient

Coca Cola  Caterpillar

Significant diversification

The 3 months correlation between Coca and Caterpillar is 0.03. Overlapping area represents the amount of risk that can be diversified away by holding The Coca Cola and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Coca Cola 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 The Coca Cola 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 Coca Cola i.e., Coca Cola and Caterpillar go up and down completely randomly.

Pair Corralation between Coca Cola and Caterpillar

Allowing for the 90-day total investment horizon The Coca Cola is expected to generate 0.38 times more return on investment than Caterpillar. However, The Coca Cola is 2.64 times less risky than Caterpillar. It trades about 0.3 of its potential returns per unit of risk. Caterpillar is currently generating about -0.19 per unit of risk. If you would invest  5,927  in The Coca Cola on February 6, 2024 and sell it today you would earn a total of  290.00  from holding The Coca Cola or generate 4.89% return on investment over 90 days.

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

The Coca Cola  vs.  Caterpillar

Coca Cola

Risk-Adjusted Performance

8 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in The Coca Cola are ranked lower than 8 (%) of all global equities and portfolios over the last 90 days. In spite of very healthy basic indicators, Coca Cola is not utilizing all of its potentials. The newest stock price disarray, may contribute to short-term losses for the investors.

Caterpillar

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating basic indicators, Caterpillar may actually be approaching a critical reversion point that can send shares even higher in June 2024.

Pair Trading with Coca Cola and Caterpillar

The main advantage of trading using opposite Coca Cola and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Coca Cola 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 The Coca Cola 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 Analyst Advice module to analyst recommendations and target price estimates broken down by several categories.