Correlation Between Caterpillar and HP

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

Diversification Opportunities for Caterpillar and HP

0.9
  Correlation Coefficient

Almost no diversification

The 3 months correlation between Caterpillar and HP is 0.9. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and HP Inc in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on HP Inc 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 HP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of HP Inc has no effect on the direction of Caterpillar i.e., Caterpillar and HP go up and down completely randomly.

Pair Corralation between Caterpillar and HP

Considering the 90-day investment horizon Caterpillar is expected to generate 1.13 times more return on investment than HP. However, Caterpillar is 1.13 times more volatile than HP Inc. It trades about 0.28 of its potential returns per unit of risk. HP Inc is currently generating about 0.22 per unit of risk. If you would invest  17,229  in Caterpillar on May 18, 2022 and sell it today you would earn a total of  2,366  from holding Caterpillar or generate 13.73% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Strong
Accuracy100.0%
ValuesDaily Returns

Caterpillar  vs.  HP Inc

 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 recent stock price uproar, may contribute to short-horizon losses for the private investors.

Caterpillar Price Channel

HP Inc 
HP Performance
0 of 100
Over the last 90 days HP Inc has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy basic indicators, HP is not utilizing all of its potentials. The newest stock price disarray, may contribute to short-term losses for the insiders.

HP Price Channel

Caterpillar and HP Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Caterpillar and HP

The main advantage of trading using opposite Caterpillar and HP positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar position performs unexpectedly, HP 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 HP will offset losses from the drop in HP's long position.
The idea behind Caterpillar and HP Inc 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 Focused Opportunities module to build portfolios using our predefined set of ideas and optimize them against your investing preferences.

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