Correlation Between Home Depot and Caterpillar

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

Diversification Opportunities for Home Depot and Caterpillar

0.21
  Correlation Coefficient

Modest diversification

The 3 months correlation between Home Depot and Caterpillar is 0.21. Overlapping area represents the amount of risk that can be diversified away by holding Home Depot and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Home Depot 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 Home Depot 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 Home Depot i.e., Home Depot and Caterpillar go up and down completely randomly.

Pair Corralation between Home Depot and Caterpillar

Allowing for the 90-day total investment horizon Home Depot is expected to generate 1.92 times less return on investment than Caterpillar. But when comparing it to its historical volatility, Home Depot is 1.22 times less risky than Caterpillar. It trades about 0.03 of its potential returns per unit of risk. Caterpillar is currently generating about 0.05 of returns per unit of risk over similar time horizon. If you would invest  13,754  in Caterpillar on May 20, 2022 and sell it today you would earn a total of  5,839  from holding Caterpillar or generate 42.45% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthVery Weak
Accuracy100.0%
ValuesDaily Returns

Home Depot  vs.  Caterpillar

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

Home Depot Price Channel

Caterpillar 
Caterpillar Performance
1 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 1 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively stable basic indicators, Caterpillar is not utilizing all of its potentials. The latest stock price uproar, may contribute to short-horizon losses for the private investors.

Caterpillar Price Channel

Home Depot and Caterpillar Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Home Depot and Caterpillar

The main advantage of trading using opposite Home Depot and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Home Depot 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 Home Depot 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 Equity Search module to search for actively traded equities including funds and ETFs from over 30 global markets.

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