Correlation Between Coca Cola and Caterpillar

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

Diversification Opportunities for Coca Cola and Caterpillar

0.02
  Correlation Coefficient

Significant diversification

The 3 months correlation between Coca Cola and Caterpillar is 0.02. Overlapping area represents the amount of risk that can be diversified away by holding Coca-Cola and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Coca Cola 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 Coca-Cola 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 Coca Cola i.e., Coca Cola and Caterpillar go up and down completely randomly.

Pair Corralation between Coca Cola and Caterpillar

Allowing for the 90-day total investment horizon Coca-Cola is expected to generate 0.58 times more return on investment than Caterpillar. However, Coca-Cola is 1.72 times less risky than Caterpillar. It trades about -0.01 of its potential returns per unit of risk. Caterpillar is currently generating about -0.04 per unit of risk. If you would invest  6,427  in Coca-Cola on May 13, 2022 and sell it today you would lose (105.00)  from holding Coca-Cola or give up 1.63% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthInsignificant
Accuracy100.0%
ValuesDaily Returns

Coca-Cola  vs.  Caterpillar

 Performance (%) 
       Timeline  
Coca-Cola 
Coca Cola Performance
0 of 100
Over the last 90 days Coca-Cola has generated negative risk-adjusted returns adding no value to investors with long positions. Despite quite persistent basic indicators, Coca Cola is not utilizing all of its potentials. The latest stock price mess, may contribute to short-term losses for the institutional investors.

Coca Cola 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 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

Coca Cola and Caterpillar Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Coca Cola and Caterpillar

The main advantage of trading using opposite Coca Cola and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Coca Cola 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 Coca-Cola 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 Price Transformation module to use Price Transformation models to analyze depth of different equity instruments across global markets.

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