Correlation Between American Century and Caterpillar

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

Diversification Opportunities for American Century and Caterpillar

0.6
  Correlation Coefficient

Poor diversification

The 3 months correlation between American and Caterpillar is 0.6. Overlapping area represents the amount of risk that can be diversified away by holding American Century Strategic and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and American Century 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 American Century Strategic 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 American Century i.e., American Century and Caterpillar go up and down completely randomly.

Pair Corralation between American Century and Caterpillar

Assuming the 90 days horizon American Century Strategic is expected to under-perform the Caterpillar. But the mutual fund apears to be less risky and, when comparing its historical volatility, American Century Strategic is 1.94 times less risky than Caterpillar. The mutual fund trades about -0.03 of its potential returns per unit of risk. The Caterpillar is currently generating about 0.01 of returns per unit of risk over similar time horizon. If you would invest  20,047  in Caterpillar on May 17, 2022 and sell it today you would lose (363.00)  from holding Caterpillar or give up 1.81% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

American Century Strategic  vs.  Caterpillar

 Performance (%) 
       Timeline  
American Century Str 
American Performance
3 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in American Century Strategic are ranked lower than 3 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong forward indicators, American Century is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

American Price Channel

Caterpillar 
Caterpillar Performance
0 of 100
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 latest stock price uproar, may contribute to short-horizon losses for the private investors.

Caterpillar Price Channel

American Century and Caterpillar Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with American Century and Caterpillar

The main advantage of trading using opposite American Century and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if American Century 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.

American Century Strategic

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The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against American Century as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. American Century's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, American Century's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to American Century Strategic.
The idea behind American Century Strategic 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.
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 Price Exposure Probability module to analyze equity upside and downside potential for a given time horizon across multiple markets.

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