Correlation Between Caterpillar and B of A

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

Diversification Opportunities for Caterpillar and B of A

0.78
  Correlation Coefficient

Poor diversification

The 3 months correlation between Caterpillar and B of A is 0.78. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Bank Of America in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Bank Of America 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 B of A. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Bank Of America has no effect on the direction of Caterpillar i.e., Caterpillar and B of A go up and down completely randomly.

Pair Corralation between Caterpillar and B of A

Considering the 90-day investment horizon Caterpillar is expected to under-perform the B of A. In addition to that, Caterpillar is 1.35 times more volatile than Bank Of America. It trades about -0.02 of its total potential returns per unit of risk. Bank Of America is currently generating about 0.17 per unit of volatility. If you would invest  3,205  in Bank Of America on May 16, 2022 and sell it today you would earn a total of  425.00  from holding Bank Of America or generate 13.26% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Caterpillar  vs.  Bank Of America

 Performance (%) 
       Timeline  
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 new stock price uproar, may contribute to short-horizon losses for the private investors.

Caterpillar Price Channel

Bank Of America 
B of A Performance
3 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Bank Of America are ranked lower than 3 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, B of A is not utilizing all of its potentials. The new stock price disturbance, may contribute to short-term losses for the investors.

B of A Price Channel

Caterpillar and B of A Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Caterpillar and B of A

The main advantage of trading using opposite Caterpillar and B of A positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar position performs unexpectedly, B of A 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 B of A will offset losses from the drop in B of A's long position.
The idea behind Caterpillar and Bank Of America 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 My Watchlist Analysis module to analyze my current watchlist and to refresh optimization strategy. Macroaxis watchlist is based on self-learning algorithm to remember stocks you like.

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