Correlation Between Universal Health and Caterpillar

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

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

Diversification Opportunities for Universal Health and Caterpillar

0.74

Correlation Coefficient

Universal Health  Caterpillar

Poor diversification

The 3 months correlation between Universal and Caterpillar is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Universal Health Services and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Universal Health 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 Universal Health Services 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 Universal Health i.e., Universal Health and Caterpillar go up and down completely randomly.

Pair Corralation between Universal Health and Caterpillar

Considering the 90-day investment horizon Universal Health Services is expected to under-perform the Caterpillar. In addition to that, Universal Health is 1.06 times more volatile than Caterpillar. It trades about -0.47 of its total potential returns per unit of risk. Caterpillar is currently generating about 0.02 per unit of volatility. If you would invest  35,645  in Caterpillar on January 20, 2024 and sell it today you would earn a total of  148.00  from holding Caterpillar or generate 0.42% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	95.45%
Values	Daily Returns

Universal Health Services  vs.  Caterpillar

Universal Health Services

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Universal Health Services has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of comparatively stable technical indicators, Universal Health is not utilizing all of its potentials. The newest stock price uproar, may contribute to short-horizon losses for the private investors.

Caterpillar

Risk-Adjusted Performance

20 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 20 (%) 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 Universal Health and Caterpillar

The main advantage of trading using opposite Universal Health and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Universal Health 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 Universal Health Services 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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.