Correlation Between Walmart and Caterpillar

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

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

Diversification Opportunities for Walmart and Caterpillar

0.87

Correlation Coefficient

Walmart  Caterpillar

Very poor diversification

The 3 months correlation between Walmart and Caterpillar is 0.87. Overlapping area represents the amount of risk that can be diversified away by holding Walmart and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Walmart 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 Walmart 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 Walmart i.e., Walmart and Caterpillar go up and down completely randomly.

Pair Corralation between Walmart and Caterpillar

Considering the 90-day investment horizon Walmart is expected to under-perform the Caterpillar. But the stock apears to be less risky and, when comparing its historical volatility, Walmart is 2.26 times less risky than Caterpillar. The stock trades about -0.21 of its potential returns per unit of risk. The Caterpillar is currently generating about -0.01 of returns per unit of risk over similar time horizon. 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	Strong
Accuracy	100.0%
Values	Daily Returns

Walmart  vs.  Caterpillar

Walmart

Risk-Adjusted Performance

14 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Walmart are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively inconsistent primary indicators, Walmart may actually be approaching a critical reversion point that can send shares even higher in May 2024.

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 Walmart and Caterpillar

The main advantage of trading using opposite Walmart and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Walmart 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 Walmart 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 Idea Breakdown module to analyze constituents of all Macroaxis ideas. Macroaxis investment ideas are predefined, sector-focused investing themes.