Correlation Between United Parcel and Caterpillar
Can any of the company-specific risk be diversified away by investing in both United Parcel 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 United Parcel and Caterpillar into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between United Parcel Service and Caterpillar, you can compare the effects of market volatilities on United Parcel 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 United Parcel with a short position of Caterpillar. Check out your portfolio center. Please also check ongoing floating volatility patterns of United Parcel and Caterpillar.
Diversification Opportunities for United Parcel and Caterpillar
-0.1 | Correlation Coefficient |
Good diversification
The 3 months correlation between United and Caterpillar is -0.1. Overlapping area represents the amount of risk that can be diversified away by holding United Parcel Service and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and United Parcel 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 United Parcel Service 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 United Parcel i.e., United Parcel and Caterpillar go up and down completely randomly.
Pair Corralation between United Parcel and Caterpillar
Considering the 90-day investment horizon United Parcel Service is expected to under-perform the Caterpillar. In addition to that, United Parcel is 1.55 times more volatile than Caterpillar. It trades about -0.16 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 Against |
| Strength | Insignificant |
| Accuracy | 100.0% |
| Values | Daily Returns |
United Parcel Service vs. Caterpillar
Performance |
| Timeline |
| United Parcel Service |
| Caterpillar |
United Parcel and Caterpillar Volatility Contrast
Predicted Return Density |
| Returns |
Pair Trading with United Parcel and Caterpillar
The main advantage of trading using opposite United Parcel and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if United Parcel 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 United Parcel Service 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.| Caterpillar vs. AGCO Corporation | Caterpillar vs. CNH Industrial NV | Caterpillar vs. Deere Company | Caterpillar vs. Lindsay |
Check out your portfolio center.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 Holdings module to check your current holdings and cash postion to detemine if your portfolio needs rebalancing.
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