Correlation Between Caterpillar and Alcoa Corp

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

Diversification Opportunities for Caterpillar and Alcoa Corp

0.59
  Correlation Coefficient

Very weak diversification

The 3 months correlation between Caterpillar and Alcoa is 0.59. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Alcoa Corp in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Alcoa Corp 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 Alcoa Corp. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Alcoa Corp has no effect on the direction of Caterpillar i.e., Caterpillar and Alcoa Corp go up and down completely randomly.

Pair Corralation between Caterpillar and Alcoa Corp

Considering the 90-day investment horizon Caterpillar is expected to generate 3.09 times less return on investment than Alcoa Corp. But when comparing it to its historical volatility, Caterpillar is 2.17 times less risky than Alcoa Corp. It trades about 0.04 of its potential returns per unit of risk. Alcoa Corp is currently generating about 0.06 of returns per unit of risk over similar time horizon. If you would invest  2,197  in Alcoa Corp on September 8, 2022 and sell it today you would earn a total of  2,463  from holding Alcoa Corp or generate 112.11% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthWeak
Accuracy100.0%
ValuesDaily Returns

Caterpillar  vs.  Alcoa Corp

 Performance (%) 
       Timeline  
Caterpillar 
Caterpillar Performance
13 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 13 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.

Caterpillar Price Channel

Alcoa Corp 
Alcoa Performance
0 of 100
Over the last 90 days Alcoa Corp has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Alcoa Corp is not utilizing all of its potentials. The new stock price disturbance, may contribute to short-term losses for the investors.

Alcoa Price Channel

Caterpillar and Alcoa Corp Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Caterpillar and Alcoa Corp

The main advantage of trading using opposite Caterpillar and Alcoa Corp positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar position performs unexpectedly, Alcoa Corp 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 Alcoa Corp will offset losses from the drop in Alcoa Corp's long position.
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The idea behind Caterpillar and Alcoa Corp 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 Price Ceiling Movement module to calculate and plot Price Ceiling Movement for different equity instruments.

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