Correlation Between Vanguard Short and Caterpillar

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

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

Diversification Opportunities for Vanguard Short and Caterpillar

0.07

Correlation Coefficient

Vanguard Short  Caterpillar

Significant diversification

The 3 months correlation between Vanguard and Caterpillar is 0.07. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Short Term Treasury and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Vanguard Short 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 Vanguard Short Term Treasury 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 Vanguard Short i.e., Vanguard Short and Caterpillar go up and down completely randomly.

Pair Corralation between Vanguard Short and Caterpillar

Given the investment horizon of 90 days Vanguard Short Term Treasury is expected to under-perform the Caterpillar. But the etf apears to be less risky and, when comparing its historical volatility, Vanguard Short Term Treasury is 10.33 times less risky than Caterpillar. The etf trades about -0.08 of its potential returns per unit of risk. The Caterpillar is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  35,466  in Caterpillar on January 24, 2024 and sell it today you would earn a total of  295.00  from holding Caterpillar or generate 0.83% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	95.24%
Values	Daily Returns

Vanguard Short Term Treasury  vs.  Caterpillar

Vanguard Short Term

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Vanguard Short Term Treasury has generated negative risk-adjusted returns adding no value to investors with long positions. Despite fairly strong basic indicators, Vanguard Short is not utilizing all of its potentials. The current stock price confusion, may contribute to short-horizon losses for the traders.

Caterpillar

Risk-Adjusted Performance

21 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 21 (%) 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 Vanguard Short and Caterpillar

The main advantage of trading using opposite Vanguard Short and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Short 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 Vanguard Short Term Treasury 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 Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.