Correlation Between Caterpillar and Brown Forman

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

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

Diversification Opportunities for Caterpillar and Brown Forman

0.27

Correlation Coefficient

Caterpillar  Brown Forman

Modest diversification

The 3 months correlation between Caterpillar and Brown is 0.27. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Brown Forman in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Brown Forman and Caterpillar 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 Caterpillar are associated (or correlated) with Brown Forman. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Brown Forman has no effect on the direction of Caterpillar i.e., Caterpillar and Brown Forman go up and down completely randomly.

Pair Corralation between Caterpillar and Brown Forman

Considering the 90-day investment horizon Caterpillar is expected to generate 1.02 times more return on investment than Brown Forman. However, Caterpillar is 1.02 times more volatile than Brown Forman. It trades about 0.13 of its potential returns per unit of risk. Brown Forman is currently generating about -0.12 per unit of risk. If you would invest  25,928  in Caterpillar on March 11, 2024 and sell it today you would earn a total of  6,966  from holding Caterpillar or generate 26.87% return on investment over 90 days.

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

Caterpillar  vs.  Brown Forman

Caterpillar

Risk-Adjusted Performance

0 of 100

Very Weak

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

Brown Forman

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Brown Forman has generated negative risk-adjusted returns adding no value to investors with long positions. Despite uncertain performance in the last few months, the Stock's basic indicators remain somewhat strong which may send shares a bit higher in July 2024. The current disturbance may also be a sign of long term up-swing for the company investors.

Pair Trading with Caterpillar and Brown Forman

The main advantage of trading using opposite Caterpillar and Brown Forman positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar position performs unexpectedly, Brown Forman 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 Brown Forman will offset losses from the drop in Brown Forman's long position.

The idea behind Caterpillar and Brown Forman 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.