Correlation Between Vanguard Total and Caterpillar

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

Diversification Opportunities for Vanguard Total and Caterpillar

0.67
  Correlation Coefficient

Poor diversification

The 3 months correlation between Vanguard and Caterpillar is 0.67. Overlapping area represents the amount of risk that can be diversified away by holding Vanguard Total International and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Vanguard Total 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 Vanguard Total International 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 Vanguard Total i.e., Vanguard Total and Caterpillar go up and down completely randomly.

Pair Corralation between Vanguard Total and Caterpillar

Given the investment horizon of 90 days Vanguard Total is expected to generate 3.51 times less return on investment than Caterpillar. But when comparing it to its historical volatility, Vanguard Total International is 1.41 times less risky than Caterpillar. It trades about 0.08 of its potential returns per unit of risk. Caterpillar is currently generating about 0.21 of returns per unit of risk over similar time horizon. If you would invest  17,963  in Caterpillar on September 2, 2022 and sell it today you would earn a total of  5,606  from holding Caterpillar or generate 31.21% return on investment over 90 days.
Time Period3 Months [change]
DirectionMoves Together 
StrengthSignificant
Accuracy100.0%
ValuesDaily Returns

Vanguard Total International  vs.  Caterpillar

 Performance (%) 
       Timeline  
Vanguard Total Inter 
Vanguard Performance
6 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Vanguard Total International are ranked lower than 6 (%) of all global equities and portfolios over the last 90 days. Even with relatively weak basic indicators, Vanguard Total may actually be approaching a critical reversion point that can send shares even higher in January 2023.

Vanguard Price Channel

Caterpillar 
Caterpillar Performance
15 of 100
Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 15 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively weak basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.

Caterpillar Price Channel

Vanguard Total and Caterpillar Volatility Contrast

   Predicted Return Density   
       Returns  

Pair Trading with Vanguard Total and Caterpillar

The main advantage of trading using opposite Vanguard Total and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Vanguard Total 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.
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The idea behind Vanguard Total International 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.
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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 Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.

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