Correlation Between Stem and Caterpillar

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

Diversification Opportunities for Stem and Caterpillar

0.41
  Correlation Coefficient

Very weak diversification

The 3 months correlation between Stem and Caterpillar is 0.41. Overlapping area represents the amount of risk that can be diversified away by holding Stem Inc and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Stem 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 Stem Inc 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 Stem i.e., Stem and Caterpillar go up and down completely randomly.

Pair Corralation between Stem and Caterpillar

Given the investment horizon of 90 days Stem Inc is expected to generate 1.79 times more return on investment than Caterpillar. However, Stem is 1.79 times more volatile than Caterpillar. It trades about 0.02 of its potential returns per unit of risk. Caterpillar is currently generating about 0.0 per unit of risk. If you would invest  1,411  in Stem Inc on July 7, 2022 and sell it today you would lose (1.00)  from holding Stem Inc or give up 0.07% of portfolio value over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthWeak
Accuracy100.0%
ValuesDaily Returns

Stem Inc  vs.  Caterpillar

 Performance (%) 
       Timeline  
Stem Inc 
Stem Performance
12 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Stem Inc are ranked lower than 12 (%) of all global equities and portfolios over the last 90 days. Even with relatively uncertain technical and fundamental indicators, Stem revealed solid returns over the last few months and may actually be approaching a breakup point.

Stem 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

Stem and Caterpillar Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Stem and Caterpillar

The main advantage of trading using opposite Stem and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Stem 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.
Stem vs. Microsoft Corp
The idea behind Stem Inc 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.
Caterpillar vs. Amazon Inc
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 Content Syndication module to quickly integrate customizable finance content to your own investment portal.

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