Correlation Between Caterpillar and IShares Commodity

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

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

Diversification Opportunities for Caterpillar and IShares Commodity

0.68

Correlation Coefficient

Caterpillar  IShares Commodity

Poor diversification

The 3 months correlation between Caterpillar and IShares is 0.68. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and iShares Commodity Curve in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Commodity Curve and Caterpillar 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 Caterpillar are associated (or correlated) with IShares Commodity. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Commodity Curve has no effect on the direction of Caterpillar i.e., Caterpillar and IShares Commodity go up and down completely randomly.

Pair Corralation between Caterpillar and IShares Commodity

Considering the 90-day investment horizon Caterpillar is expected to generate 2.0 times more return on investment than IShares Commodity. However, Caterpillar is 2.0 times more volatile than iShares Commodity Curve. It trades about 0.12 of its potential returns per unit of risk. iShares Commodity Curve is currently generating about 0.07 per unit of risk. If you would invest  33,836  in Caterpillar on September 12, 2024 and sell it today you would earn a total of  5,003  from holding Caterpillar or generate 14.79% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

Caterpillar  vs.  iShares Commodity Curve

Caterpillar

Risk-Adjusted Performance

9 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 9 (%) 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.

iShares Commodity Curve

Risk-Adjusted Performance

5 of 100

OK

Compared to the overall equity markets, risk-adjusted returns on investments in iShares Commodity Curve are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, IShares Commodity is not utilizing all of its potentials. The current stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Caterpillar and IShares Commodity

The main advantage of trading using opposite Caterpillar and IShares Commodity positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Caterpillar position performs unexpectedly, IShares Commodity 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 IShares Commodity will offset losses from the drop in IShares Commodity's long position.

The idea behind Caterpillar and iShares Commodity Curve 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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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 Portfolio Backtesting module to avoid under-diversification and over-optimization by backtesting your portfolios.