Correlation Between Fundamental Investors and Caterpillar

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Can any of the company-specific risk be diversified away by investing in both Fundamental Investors 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 Fundamental Investors and Caterpillar into the same portfolio, which is an essential part of the fundamental portfolio management process.
By analyzing existing cross correlation between Fundamental Investors Class and Caterpillar, you can compare the effects of market volatilities on Fundamental Investors 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 Fundamental Investors with a short position of Caterpillar. Check out your portfolio center. Please also check ongoing floating volatility patterns of Fundamental Investors and Caterpillar.

Diversification Opportunities for Fundamental Investors and Caterpillar

  Correlation Coefficient

Very weak diversification

The 3 months correlation between Fundamental and Caterpillar is 0.56. Overlapping area represents the amount of risk that can be diversified away by holding Fundamental Investors Class and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Fundamental Investors 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 Fundamental Investors Class 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 Fundamental Investors i.e., Fundamental Investors and Caterpillar go up and down completely randomly.

Pair Corralation between Fundamental Investors and Caterpillar

Assuming the 90 days horizon Fundamental Investors is expected to generate 1.54 times less return on investment than Caterpillar. But when comparing it to its historical volatility, Fundamental Investors Class is 1.07 times less risky than Caterpillar. It trades about 0.21 of its potential returns per unit of risk. Caterpillar is currently generating about 0.3 of returns per unit of risk over similar time horizon. If you would invest  21,214  in Caterpillar on August 28, 2022 and sell it today you would earn a total of  2,356  from holding Caterpillar or generate 11.11% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
ValuesDaily Returns

Fundamental Investors Class  vs.  Caterpillar

 Performance (%) 
Fundamental Investors 
Fundamental Performance
2 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Fundamental Investors Class are ranked lower than 2 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong technical and fundamental indicators, Fundamental Investors is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Fundamental Price Channel

Caterpillar Performance
12 of 100
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 fragile basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.

Caterpillar Price Channel

Fundamental Investors and Caterpillar Volatility Contrast

   Predicted Return Density   

Pair Trading with Fundamental Investors and Caterpillar

The main advantage of trading using opposite Fundamental Investors and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Fundamental Investors 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.
Fundamental Investors vs. Vanguard Index Trust
The idea behind Fundamental Investors Class 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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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 Options Analysis module to analyze and evaluate options and option chains as a potential hedge for your portfolios.

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