Correlation Between Caterpillar and ImagineAR

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

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

Diversification Opportunities for Caterpillar and ImagineAR

0.74

Correlation Coefficient

Caterpillar  ImagineAR

Poor diversification

The 3 months correlation between Caterpillar and ImagineAR is 0.74. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and ImagineAR in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on ImagineAR 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 ImagineAR. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of ImagineAR has no effect on the direction of Caterpillar i.e., Caterpillar and ImagineAR go up and down completely randomly.

Pair Corralation between Caterpillar and ImagineAR

Considering the 90-day investment horizon Caterpillar is expected to generate 5.42 times less return on investment than ImagineAR. But when comparing it to its historical volatility, Caterpillar is 6.56 times less risky than ImagineAR. It trades about 0.16 of its potential returns per unit of risk. ImagineAR is currently generating about 0.14 of returns per unit of risk over similar time horizon. If you would invest  2.98  in ImagineAR on September 5, 2024 and sell it today you would earn a total of  2.50  from holding ImagineAR or generate 83.89% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	98.44%
Values	Daily Returns

Caterpillar  vs.  ImagineAR

Caterpillar

Risk-Adjusted Performance

12 of 100

Good

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 12 (%) 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.

ImagineAR

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in ImagineAR are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. Despite nearly uncertain technical and fundamental indicators, ImagineAR reported solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Caterpillar and ImagineAR

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

The idea behind Caterpillar and ImagineAR 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.

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 Idea Optimizer module to use advanced portfolio builder with pre-computed micro ideas to build optimal portfolio .