Correlation Between Caterpillar and Invesco DWA

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

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

Diversification Opportunities for Caterpillar and Invesco DWA

0.65

Correlation Coefficient

Caterpillar  Invesco DWA

Poor diversification

The 3 months correlation between Caterpillar and Invesco is 0.65. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and Invesco DWA Energy in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Invesco DWA Energy 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 Invesco DWA. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Invesco DWA Energy has no effect on the direction of Caterpillar i.e., Caterpillar and Invesco DWA go up and down completely randomly.

Pair Corralation between Caterpillar and Invesco DWA

Considering the 90-day investment horizon Caterpillar is expected to generate 1.17 times more return on investment than Invesco DWA. However, Caterpillar is 1.17 times more volatile than Invesco DWA Energy. It trades about 0.07 of its potential returns per unit of risk. Invesco DWA Energy is currently generating about 0.07 per unit of risk. If you would invest  35,242  in Caterpillar on September 17, 2024 and sell it today you would earn a total of  2,809  from holding Caterpillar or generate 7.97% return on investment over 90 days.

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

Caterpillar  vs.  Invesco DWA Energy

Caterpillar

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. In spite of comparatively unfluctuating basic indicators, Caterpillar may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Invesco DWA Energy

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Invesco DWA Energy are ranked lower than 5 (%) of all global equities and portfolios over the last 90 days. Despite fairly unsteady basic indicators, Invesco DWA may actually be approaching a critical reversion point that can send shares even higher in January 2025.

Pair Trading with Caterpillar and Invesco DWA

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

The idea behind Caterpillar and Invesco DWA Energy 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 Comparator module to compare the composition, asset allocations and performance of any two portfolios in your account.