Correlation Between Cisco Systems and Caterpillar

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

Diversification Opportunities for Cisco Systems and Caterpillar

0.49
  Correlation Coefficient

Very weak diversification

The 3 months correlation between Cisco and Caterpillar is 0.49. Overlapping area represents the amount of risk that can be diversified away by holding Cisco Systems and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Cisco Systems 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 Cisco Systems are associated (or correlated) with Caterpillar. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Caterpillar has no effect on the direction of Cisco Systems i.e., Cisco Systems and Caterpillar go up and down completely randomly.

Pair Corralation between Cisco Systems and Caterpillar

Given the investment horizon of 90 days Cisco Systems is expected to generate 1.49 times less return on investment than Caterpillar. But when comparing it to its historical volatility, Cisco Systems is 1.23 times less risky than Caterpillar. It trades about 0.03 of its potential returns per unit of risk. Caterpillar is currently generating about 0.04 of returns per unit of risk over similar time horizon. If you would invest  14,470  in Caterpillar on May 9, 2022 and sell it today you would earn a total of  4,069  from holding Caterpillar or generate 28.12% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthWeak
Accuracy100.0%
ValuesDaily Returns

Cisco Systems  vs.  Caterpillar

 Performance (%) 
       Timeline  
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 latest stock price mess, may contribute to short-term losses for the institutional investors.

Cisco Price Channel

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 and Caterpillar Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Cisco Systems and Caterpillar

The main advantage of trading using opposite Cisco Systems and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Cisco Systems position performs unexpectedly, Caterpillar 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 Caterpillar will offset losses from the drop in Caterpillar's long position.
The idea behind Cisco Systems and Caterpillar 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 Instant Ratings module to determine any equity ratings based on digital recommendations. Macroaxis instant equity ratings are based on combination of fundamental analysis and risk-adjusted market performance.

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