Correlation Between Caterpillar and WisdomTree Quality

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

By analyzing existing cross correlation between Caterpillar and WisdomTree Quality Dividend, you can compare the effects of market volatilities on Caterpillar and WisdomTree Quality 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 WisdomTree Quality. Check out your portfolio center. Please also check ongoing floating volatility patterns of Caterpillar and WisdomTree Quality.

Diversification Opportunities for Caterpillar and WisdomTree Quality

0.63

Correlation Coefficient

Caterpillar  WisdomTree Quality

Poor diversification

The 3 months correlation between Caterpillar and WisdomTree is 0.63. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and WisdomTree Quality Dividend in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on WisdomTree Quality 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 WisdomTree Quality. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of WisdomTree Quality has no effect on the direction of Caterpillar i.e., Caterpillar and WisdomTree Quality go up and down completely randomly.

Pair Corralation between Caterpillar and WisdomTree Quality

Considering the 90-day investment horizon Caterpillar is expected to under-perform the WisdomTree Quality. In addition to that, Caterpillar is 2.96 times more volatile than WisdomTree Quality Dividend. It trades about -0.08 of its total potential returns per unit of risk. WisdomTree Quality Dividend is currently generating about -0.04 per unit of volatility. If you would invest  8,332  in WisdomTree Quality Dividend on September 18, 2024 and sell it today you would lose (28.00) from holding WisdomTree Quality Dividend or give up 0.34% of portfolio value over 90 days.

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

Caterpillar  vs.  WisdomTree Quality Dividend

Caterpillar

Risk-Adjusted Performance

4 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively inconsistent basic indicators, Caterpillar may actually be approaching a critical reversion point that can send shares even higher in January 2025.

WisdomTree Quality

Risk-Adjusted Performance

4 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in WisdomTree Quality Dividend are ranked lower than 4 (%) of all global equities and portfolios over the last 90 days. In spite of fairly stable basic indicators, WisdomTree Quality is not utilizing all of its potentials. The recent stock price fuss, may contribute to near-short-term losses for the sophisticated investors.

Pair Trading with Caterpillar and WisdomTree Quality

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

The idea behind Caterpillar and WisdomTree Quality Dividend 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 AI Portfolio Architect module to use AI to generate optimal portfolios and find profitable investment opportunities.