Correlation Between Natural Hlth and Caterpillar

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

Diversification Opportunities for Natural Hlth and Caterpillar

0.83
  Correlation Coefficient

Very poor diversification

The 3 months correlation between Natural and Caterpillar is 0.83. Overlapping area represents the amount of risk that can be diversified away by holding Natural Hlth Trd and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Natural Hlth 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 Natural Hlth Trd 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 Natural Hlth i.e., Natural Hlth and Caterpillar go up and down completely randomly.

Pair Corralation between Natural Hlth and Caterpillar

Given the investment horizon of 90 days Natural Hlth is expected to generate 3.66 times less return on investment than Caterpillar. But when comparing it to its historical volatility, Natural Hlth Trd is 1.05 times less risky than Caterpillar. It trades about 0.05 of its potential returns per unit of risk. Caterpillar is currently generating about 0.18 of returns per unit of risk over similar time horizon. If you would invest  17,381  in Caterpillar on May 12, 2022 and sell it today you would earn a total of  1,558  from holding Caterpillar or generate 8.96% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthStrong
Accuracy100.0%
ValuesDaily Returns

Natural Hlth Trd  vs.  Caterpillar

 Performance (%) 
       Timeline  
Natural Hlth Trd 
Natural Performance
0 of 100
Over the last 90 days Natural Hlth Trd has generated negative risk-adjusted returns adding no value to investors with long positions. Despite weak performance in the last few months, the Stock's basic indicators remain somewhat strong which may send shares a bit higher in September 2022. The current disturbance may also be a sign of long term up-swing for the company investors.

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

Caterpillar Price Channel

Natural Hlth and Caterpillar Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Natural Hlth and Caterpillar

The main advantage of trading using opposite Natural Hlth and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Natural Hlth 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.

Natural Hlth Trd

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The effect of pair diversification on risk is to reduce it, but we should note this doesn't apply to all risk types. When we trade pairs against Natural Hlth as a counterpart, there is always some inherent risk that will never be diversified away no matter what. This volatility limits the effect of tactical diversification using pair trading. Natural Hlth's systematic risk is the inherent uncertainty of the entire market, and therefore cannot be mitigated even by pair-trading it against the equity that is not highly correlated to it. On the other hand, Natural Hlth's unsystematic risk describes the types of risk that we can protect against, at least to some degree, by selecting a matching pair that is not perfectly correlated to Natural Hlth Trd.
The idea behind Natural Hlth Trd 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 Portfolio File Import module to quickly import all of your third-party portfolios from your local drive in csv format.

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