Correlation Between Lightning EMotors and Caterpillar

Can any of the company-specific risk be diversified away by investing in both Lightning EMotors 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 Lightning EMotors and Caterpillar into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Lightning eMotors and Caterpillar, you can compare the effects of market volatilities on Lightning EMotors 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 Lightning EMotors with a short position of Caterpillar. Check out your portfolio center. Please also check ongoing floating volatility patterns of Lightning EMotors and Caterpillar.

Diversification Opportunities for Lightning EMotors and Caterpillar

0.18

Correlation Coefficient

Lightning EMotors  Caterpillar

Average diversification

The 3 months correlation between Lightning and Caterpillar is 0.18. Overlapping area represents the amount of risk that can be diversified away by holding Lightning eMotors and Caterpillar in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Caterpillar and Lightning EMotors 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 Lightning eMotors 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 Lightning EMotors i.e., Lightning EMotors and Caterpillar go up and down completely randomly.

Pair Corralation between Lightning EMotors and Caterpillar

Assuming the 90 days horizon Lightning eMotors is expected to generate 34.8 times more return on investment than Caterpillar. However, Lightning EMotors is 34.8 times more volatile than Caterpillar. It trades about 0.07 of its potential returns per unit of risk. Caterpillar is currently generating about 0.08 per unit of risk. If you would invest  0.16  in Lightning eMotors on January 28, 2024 and sell it today you would lose (0.05) from holding Lightning eMotors or give up 31.25% of portfolio value over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Insignificant
Accuracy	13.64%
Values	Daily Returns

Lightning eMotors  vs.  Caterpillar

Lightning eMotors

Risk-Adjusted Performance

0 of 100

Solid

Over the last 90 days Lightning eMotors has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of fairly weak basic indicators, Lightning EMotors showed solid returns over the last few months and may actually be approaching a breakup point.

Caterpillar

Risk-Adjusted Performance

10 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 10 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating basic indicators, Caterpillar unveiled solid returns over the last few months and may actually be approaching a breakup point.

Pair Trading with Lightning EMotors and Caterpillar

The main advantage of trading using opposite Lightning EMotors and Caterpillar positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Lightning EMotors 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 Lightning eMotors 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 the Crypto Correlations module to use cryptocurrency correlation module to diversify your cryptocurrency portfolio across multiple coins.