Correlation Between Caterpillar and Ford

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

Diversification Opportunities for Caterpillar and Ford

0.3
  Correlation Coefficient

Weak diversification

The 3 months correlation between Caterpillar and Ford is 0.3. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Ford Motor in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Ford Motor 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 Ford. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Ford Motor has no effect on the direction of Caterpillar i.e., Caterpillar and Ford go up and down completely randomly.

Pair Corralation between Caterpillar and Ford

Considering the 90-day investment horizon Caterpillar is expected to under-perform the Ford. But the stock apears to be less risky and, when comparing its historical volatility, Caterpillar is 1.19 times less risky than Ford. The stock trades about -0.03 of its potential returns per unit of risk. The Ford Motor is currently generating about 0.25 of returns per unit of risk over similar time horizon. If you would invest  1,208  in Ford Motor on May 15, 2022 and sell it today you would earn a total of  410.00  from holding Ford Motor or generate 33.94% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Weak
Accuracy100.0%
ValuesDaily Returns

Caterpillar  vs.  Ford Motor

 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

Ford Motor 
Ford Performance
10 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Ford Motor are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of rather sluggish technical and fundamental indicators, Ford exhibited solid returns over the last few months and may actually be approaching a breakup point.

Ford Price Channel

Caterpillar and Ford Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Caterpillar and Ford

The main advantage of trading using opposite Caterpillar and Ford positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar position performs unexpectedly, Ford 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 Ford will offset losses from the drop in Ford's long position.
The idea behind Caterpillar and Ford Motor 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 Probability Of Bankruptcy module to get analysis of equity chance of financial distress in the next 2 years.

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