Correlation Between Caterpillar and Cisco Systems

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

Diversification Opportunities for Caterpillar and Cisco Systems

0.48
  Correlation Coefficient

Very weak diversification

The 3 months correlation between Caterpillar and Cisco is 0.48. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Cisco Systems in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Cisco 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 Cisco Systems. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Cisco Systems has no effect on the direction of Caterpillar i.e., Caterpillar and Cisco Systems go up and down completely randomly.

Pair Corralation between Caterpillar and Cisco Systems

Considering the 90-day investment horizon Caterpillar is expected to generate 1.13 times more return on investment than Cisco Systems. However, Caterpillar is 1.13 times more volatile than Cisco Systems. It trades about -0.02 of its potential returns per unit of risk. Cisco Systems is currently generating about -0.04 per unit of risk. If you would invest  21,296  in Caterpillar on May 11, 2022 and sell it today you would lose (2,715)  from holding Caterpillar or give up 12.75% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthWeak
Accuracy100.0%
ValuesDaily Returns

Caterpillar  vs.  Cisco Systems

 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 latest weak performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

Caterpillar Price Channel

Cisco Systems 
Cisco Performance
0 of 100
Over the last 90 days Cisco Systems has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent fundamental indicators, Cisco Systems is not utilizing all of its potentials. The current stock price mess, may contribute to short-term losses for the institutional investors.

Cisco Price Channel

Caterpillar and Cisco Systems Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Caterpillar and Cisco Systems

The main advantage of trading using opposite Caterpillar and Cisco Systems positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar position performs unexpectedly, Cisco 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 Cisco Systems will offset losses from the drop in Cisco Systems' long position.
The idea behind Caterpillar and Cisco 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.

Cisco Systems

Pair trading matchups for Cisco Systems

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 Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.

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