Correlation Between Caterpillar and General Electric

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

Diversification Opportunities for Caterpillar and General Electric

0.75
  Correlation Coefficient

Poor diversification

The 3 months correlation between Caterpillar and General is 0.75. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and General Electric in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on General Electric 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 General Electric. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of General Electric has no effect on the direction of Caterpillar i.e., Caterpillar and General Electric go up and down completely randomly.

Pair Corralation between Caterpillar and General Electric

Considering the 90-day investment horizon Caterpillar is expected to generate 1.71 times less return on investment than General Electric. In addition to that, Caterpillar is 1.31 times more volatile than General Electric. It trades about 0.33 of its total potential returns per unit of risk. General Electric is currently generating about 0.74 per unit of volatility. If you would invest  6,109  in General Electric on May 15, 2022 and sell it today you would earn a total of  1,884  from holding General Electric or generate 30.84% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Caterpillar  vs.  General Electric

 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

General Electric 
General Performance
4 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in General Electric are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of rather sluggish technical and fundamental indicators, General Electric may actually be approaching a critical reversion point that can send shares even higher in September 2022.

General Price Channel

Caterpillar and General Electric Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Caterpillar and General Electric

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

General Electric

Pair trading matchups for General Electric

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 Bollinger Bands module to use Bollinger Bands indicator to analyze target price for a given investing horizon.

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