Correlation Between Caterpillar and Adobe Systems

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

Diversification Opportunities for Caterpillar and Adobe Systems

  Correlation Coefficient

Modest diversification

The 3 months correlation between Caterpillar and Adobe is 0.23. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Adobe Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Adobe Systems 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 Adobe Systems. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Adobe Systems has no effect on the direction of Caterpillar i.e., Caterpillar and Adobe Systems go up and down completely randomly.

Pair Corralation between Caterpillar and Adobe Systems

Considering the 90-day investment horizon Caterpillar is expected to generate 0.79 times more return on investment than Adobe Systems. However, Caterpillar is 1.26 times less risky than Adobe Systems. It trades about 0.04 of its potential returns per unit of risk. Adobe Systems is currently generating about -0.02 per unit of risk. If you would invest  17,233  in Caterpillar on August 31, 2022 and sell it today you would earn a total of  6,279  from holding Caterpillar or generate 36.44% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Weak
ValuesDaily Returns

Caterpillar  vs.  Adobe Systems

 Performance (%) 
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 fragile basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.

Caterpillar Price Channel

Adobe Systems 
Adobe Performance
0 of 100
Over the last 90 days Adobe Systems has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest uncertain performance, the Stock's fundamental drivers remain sound and the latest tumult on Wall Street may also be a sign of longer-term gains for the firm shareholders.

Adobe Price Channel

Caterpillar and Adobe Systems Volatility Contrast

   Predicted Return Density   

Pair Trading with Caterpillar and Adobe Systems

The main advantage of trading using opposite Caterpillar and Adobe Systems positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar position performs unexpectedly, Adobe Systems 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 Adobe Systems will offset losses from the drop in Adobe Systems' long position.
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The idea behind Caterpillar and Adobe Systems 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 Anywhere module to track or share privately all of your investments from the convenience of any device.

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