Correlation Between Caterpillar and IShares SP

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

By analyzing existing cross correlation between Caterpillar and iShares SP Mid Cap, you can compare the effects of market volatilities on Caterpillar and IShares SP 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 SP. Check out your portfolio center. Please also check ongoing floating volatility patterns of Caterpillar and IShares SP.

Diversification Opportunities for Caterpillar and IShares SP

0.79

Correlation Coefficient

Caterpillar  IShares SP

Poor diversification

The 3 months correlation between Caterpillar and IShares is 0.79. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and iShares SP Mid Cap in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares SP Mid 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 SP. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares SP Mid has no effect on the direction of Caterpillar i.e., Caterpillar and IShares SP go up and down completely randomly.

Pair Corralation between Caterpillar and IShares SP

Considering the 90-day investment horizon Caterpillar is expected to under-perform the IShares SP. In addition to that, Caterpillar is 1.75 times more volatile than iShares SP Mid Cap. It trades about -0.08 of its total potential returns per unit of risk. iShares SP Mid Cap is currently generating about -0.06 per unit of volatility. If you would invest  12,371  in iShares SP Mid Cap on December 30, 2024 and sell it today you would lose (452.00) from holding iShares SP Mid Cap or give up 3.65% of portfolio value over 90 days.

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

Caterpillar  vs.  iShares SP Mid Cap

Caterpillar

Risk-Adjusted Performance

Very Weak

Over the last 90 days Caterpillar has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of latest unfluctuating performance, the Stock's basic indicators remain stable and the newest uproar on Wall Street may also be a sign of mid-term gains for the firm private investors.

iShares SP Mid

Risk-Adjusted Performance

Very Weak

Over the last 90 days iShares SP Mid Cap has generated negative risk-adjusted returns adding no value to investors with long positions. Even with relatively steady forward-looking indicators, IShares SP is not utilizing all of its potentials. The latest stock price chaos, may contribute to medium-term losses for the stakeholders.

Pair Trading with Caterpillar and IShares SP

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

The idea behind Caterpillar and iShares SP Mid Cap 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 Equity Analysis module to research over 250,000 global equities including funds, stocks and ETFs to find investment opportunities.