Correlation Between Caterpillar and Clearwater Paper

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

Diversification Opportunities for Caterpillar and Clearwater Paper

-0.2
  Correlation Coefficient

Good diversification

The 3 months correlation between Caterpillar and Clearwater is -0.2. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Clearwater Paper in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Clearwater Paper 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 Clearwater Paper. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Clearwater Paper has no effect on the direction of Caterpillar i.e., Caterpillar and Clearwater Paper go up and down completely randomly.

Pair Corralation between Caterpillar and Clearwater Paper

Considering the 90-day investment horizon Caterpillar is expected to generate 0.65 times more return on investment than Clearwater Paper. However, Caterpillar is 1.54 times less risky than Clearwater Paper. It trades about 0.2 of its potential returns per unit of risk. Clearwater Paper is currently generating about 0.11 per unit of risk. If you would invest  21,850  in Caterpillar on September 2, 2022 and sell it today you would earn a total of  1,473  from holding Caterpillar or generate 6.74% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Against 
StrengthInsignificant
Accuracy100.0%
ValuesDaily Returns

Caterpillar  vs.  Clearwater Paper

 Performance (%) 
       Timeline  
Caterpillar 
Caterpillar Performance
14 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 14 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively sluggish basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.

Caterpillar Price Channel

Clearwater Paper 
Clearwater Performance
0 of 100
Over the last 90 days Clearwater Paper has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly stable essential indicators, Clearwater Paper is not utilizing all of its potentials. The latest stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Clearwater Price Channel

Caterpillar and Clearwater Paper Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Caterpillar and Clearwater Paper

The main advantage of trading using opposite Caterpillar and Clearwater Paper positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar position performs unexpectedly, Clearwater Paper 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 Clearwater Paper will offset losses from the drop in Clearwater Paper's long position.
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The idea behind Caterpillar and Clearwater Paper 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 Portfolio Diagnostics module to use generated alerts and portfolio events aggregator to diagnose current holdings.

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