Correlation Between Root and Caterpillar

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

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

Diversification Opportunities for Root and Caterpillar

0.81

Correlation Coefficient

Root  Caterpillar

Very poor diversification

The 3 months correlation between Root and Caterpillar is 0.81. Overlapping area represents the amount of risk that can be diversified away by holding Root Inc and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Root 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 Root Inc 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 Root i.e., Root and Caterpillar go up and down completely randomly.

Pair Corralation between Root and Caterpillar

Given the investment horizon of 90 days Root Inc is expected to generate 3.84 times more return on investment than Caterpillar. However, Root is 3.84 times more volatile than Caterpillar. It trades about 0.08 of its potential returns per unit of risk. Caterpillar is currently generating about 0.03 per unit of risk. If you would invest  5,376  in Root Inc on February 21, 2024 and sell it today you would earn a total of  838.00  from holding Root Inc or generate 15.59% return on investment over 90 days.

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

Root Inc  vs.  Caterpillar

Root Inc

Risk-Adjusted Performance

25 of 100

Solid

Compared to the overall equity markets, risk-adjusted returns on investments in Root Inc are ranked lower than 25 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively inconsistent basic indicators, Root unveiled solid returns over the last few months and may actually be approaching a breakup point.

Caterpillar

Risk-Adjusted Performance

11 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 11 (%) 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 Root and Caterpillar

The main advantage of trading using opposite Root and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Root 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 Root Inc 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 Analyzer module to analyze all characteristics, volatility and risk-adjusted return of Macroaxis ideas.