Correlation Between Caterpillar and IShares Mortgage

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

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

Diversification Opportunities for Caterpillar and IShares Mortgage

-0.39

Correlation Coefficient

Caterpillar  IShares Mortgage

Very good diversification

The 3 months correlation between Caterpillar and IShares is -0.39. Overlapping area represents the amount of risk that can be diversified away by holding Caterpillar and iShares Mortgage Real in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on iShares Mortgage Real 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 Mortgage. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of iShares Mortgage Real has no effect on the direction of Caterpillar i.e., Caterpillar and IShares Mortgage go up and down completely randomly.

Pair Corralation between Caterpillar and IShares Mortgage

Considering the 90-day investment horizon Caterpillar is expected to generate 2.21 times more return on investment than IShares Mortgage. However, Caterpillar is 2.21 times more volatile than iShares Mortgage Real. It trades about 0.09 of its potential returns per unit of risk. iShares Mortgage Real is currently generating about -0.05 per unit of risk. If you would invest  34,671  in Caterpillar on September 16, 2024 and sell it today you would earn a total of  3,380  from holding Caterpillar or generate 9.75% return on investment over 90 days.

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

Caterpillar  vs.  iShares Mortgage Real

Caterpillar

Risk-Adjusted Performance

6 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Caterpillar are ranked lower than 6 (%) 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.

iShares Mortgage Real

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days iShares Mortgage Real has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of very healthy technical and fundamental indicators, IShares Mortgage is not utilizing all of its potentials. The newest stock price disarray, may contribute to short-term losses for the investors.

Pair Trading with Caterpillar and IShares Mortgage

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

The idea behind Caterpillar and iShares Mortgage Real 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 Earnings Calls module to check upcoming earnings announcements updated hourly across public exchanges.